information according to Pillar 3 2012mb.cision.com/Main/3555/9371358/92924.pdf · OPERATIONS 51 OPERATIONAL RISK 52 RISKS IN THE COMPENSATION SYSTEM 54 ECONOMIC CAPITAL 55 CAPITAL

Risk and capital management– information according to Pillar 3

2012

II HANDELSBANKEN | RISK AND CAPITAL MANAGEMENT 2012

This is HandelsbankenHandelsbanken is a full-service bank for both private and corporate customers with a nationwide branch network in Sweden, the UK, Denmark, Finland and Norway. In January 2013, Handelsbanken started a regional bank in the Netherlands. The Bank regards these countries as its home markets. Handelsbanken was founded in 1871 and has operations in 24 countries.

The purpose of this publication is to provide information about risks, risk management and capital adequacy as described in Pillar 3 of the capital adequacy regulations (Basel II).

HANDELSBANKEN | RISK AND CAPITAL MANAGEMENT 2012 1

Svenska Handelsbanken AB (publ)Corporate identity no: 502007-7862Registered office: Stockholmwww.handelsbanken.com

This report is also available in Swedish.

READ MORE ON OUR WEBSITEMore information about risk and capital management at Handelsbanken is available at www.handelsbanken.se/ireng. This includes information concerning Pillar 3 since 2007.

Contents

INTRODUCTION 2

Scope 2

Trends during 2012 2

Future capital requirements 2

CRDIV/CRR 2

Stricter requirements in Sweden 3

Higher risk weightings on Swedish mortgage loans 3

New liquidity regulations 3

RISK MANAGEMENT 4

RISK ORGANISATION 6

Reporting and monitoring of risk and capital situation 6

CREDIT RISK 7

Measurement of credit risks 8

Collateral 13

THE RISK IN HANDELSBANKEN’S MORTGAGE FINANCING IS LOW 16

Credit portfolio 17

Impairments and past due loans 22

Capital requirement for credit risks 26

Counterparty risk 35

Payment risk 35

THE IMPORTANCE OF DEPOSITS AS FUNDING, INTERNATIONAL FUN-DING AND ASSET ENCUMBRANCE – HANDELSBANKEN’S VIEW OF THREE TOPICAL QUESTIONS REGARDING BANKS’ FUNDING 36

MARKET RISK 40

Interest rate risk 42

Equity price risk 43

Exchange rate risk 43

Commodity price risk 43

FUNDING AND LIQUIDITY RISK 44

RISKS IN THE INSURANCE OPERATIONS 51

OPERATIONAL RISK 52

RISKS IN THE COMPENSATION SYSTEM 54

ECONOMIC CAPITAL 55

CAPITAL PLANNING 56

CAPITAL BASE AND CAPITAL REQUIREMENT 57

Capital base 57

Capital requirement 58

Capital adequacy for the fi nancial conglomerate 58

BANKING GROUP 59

DEFINITIONS AND EXPLANATIONS 60

INTRODUCTION

2 HANDELSBANKEN | RISK AND CAPITAL MANAGEMENT 2012

IntroductionThe purpose of this publication is to provide information about risks, risk management and capital adequacy as described in Pillar 3 of the capital adequacy regulations (Basel II). The disclosure requirements are specified in the Swedish Financial Supervisory Authority’s directives (FFFS 2007:5). Complete information is published every year in the form of this document. For periodic information, see the relevant interim report.

SCOPEThis publication contains a detailed description of risks that exist at the Bank, risk management and capital requirements. The information is presented as at 31 December 2012, unless specified otherwise.

The disclosure requirements in Pillar 3 include a description of the Bank’s capital requirement for credit, market and operational risk (Pillar 1), as well as information about the Bank’s internal processes to assess the Bank’s total capital requirement (Pillar 2). The latter includes risk types in addition to those in Pillar 1.

Svenska Handelsbanken AB (publ)1 is the parent company in the Handelsbanken Group. In the context of capital adequacy, it is the bank-ing group that is subject to capital requirements and not the entire Group. Thus, information in this publication is principally provided for the banking group. If the information refers to the Group, this is specifically stated. Handelsbanken is also covered by the rules applying to financial conglomerates. The conglomerate rules mean that the capital requirement for the banking group and the capital requirement for the insur-ance operations are combined. The conglomer-ate is not covered by the Pillar 3 rules.

For capital adequacy purposes all companies are fully consolidated; in the group accounts, associated companies are consolidated using the equity method. The Group’s Annual Report provides information about which subsidiaries exist. Companies that are part of the bank-ing group and thus covered by the capital adequacy requirements according to the capital adequacy regulations are listed on page 59.

In 2007, Handelsbanken received initial permission from the Swedish Financial Super-visory Authority to report parts of the portfolio according to the IRB foundation approach. In 2010, Handelsbanken also received permission from the Swedish Financial Supervisory Author-ity to report parts of the corporate portfolio using the advanced IRB approach whereby the Bank uses its own estimates for the LGD (Loss Given Default) and CF (Conversion Factor) risk parameters. In 2012, a supplementary applica-tion was submitted to the Swedish Financial Supervisory Authority for Large corporates. At the end of 2012, Handelsbanken had calculated the capital requirement using the IRB approach for about 89 (90) per cent of total risk-weighted

assets, according to the Basel II rules. Some 61 (58) per cent of the corporate exposures, reported according to the IRB approach, were reported using the advanced approach.

Since 2008, Handelsbanken’s goal is that available financial resources (AFR) must be at least 120 per cent of economic capital (EC) and that the tier 1 capital ratio according to Basel II in the long term should be in the 9–11 per cent interval. In view of the anticipated new rules concerning increased capital requirements (see below), the Bank has opted to increase its capitalisation above the target interval. At the end of 2012, the tier 1 capital ratio according to Basel II was 21.0 per cent (18.4). Adjusted capital targets can be decided when the new regulations have been established.

TRENDS DURING 2012The year was subject to debt problems, particu-larly in the eurozone, financial markets which were very stressed at times, and a slowdown of the global business cycle. Handelsbanken’s credit risk, measured as the average risk weight in approved IRB exposures, continued to fall during the year. The lower risk weight for corporate exposures is due to new business having been with counterparties in better risk classes and better collateral than the average of the Bank’s existing credit portfolio. This mainly applies to exposures which are calculated using the IRB advanced approach.

Handelsbanken’s exposure to market risk is also low. Essentially, market risks in the banking operations are only taken as part of meeting customers’ investment and risk management needs. During the past few years, the Bank has worked actively to reduce the market risks in its balance sheet. One result of this is that a much smaller part of the earnings come from net gains/losses on financial items at fair value. Handelsbanken has a strong liquidity situation. The total liquidity reserve provides a high degree of resistance to possible disruptions in the financial markets. At the year-end, the Bank’s liquidity reserve exceeded SEK 750 billion.

FUTURE CAPITAL REQUIREMENTSAgainst the background of the financial problems arising due to the financial crisis of recent years, an international process has been started to reform the regulations applying to

banking operations. Changed regulations have been decided by the Basel Committee within the framework of the Basel III accord. The framework aims to strengthen the resilience of individual banks and to help prevent the build-up of potential systemic risks in the banking system. Amongst the changes proposed in the rules are higher minimum capital requirements, and a stricter approach to the capital which can be used for capital adequacy and for the calculation of a bank’s risk-weighted assets. In addition to the minimum capital adequacy requirements, buffer requirements are being introduced. Alongside the risk-based measures, a mainly non-risk-based measure of financial strength is also being proposed, called a lever-age ratio (LR). Also in the area of liquidity, a number of new regulations are being proposed to strengthen financial stability.

CRDIV/CRRThe European Commission presented its official proposal for new regulations in July 2011 (CR-DIV/CRR), which is based on the Basel III accord. New stricter minimum capitalisation requirements are being introduced for the components in the capital base with the highest quality – core tier 1 capital and tier 1 capital. In addition to the mini-mum capital requirements, a capital conservation buffer is being introduced. This is built up during good times to prevent banks from breaching capital requirements during difficult periods. There are also requirements for a countercyclical buffer. This requirement will vary over a business cycle in order to counteract excessive credit growth. To avoid restrictions on dividends, for ex-ample, these buffers must be covered by capital.

The new regulations are expected to be implemented during 2013 or 2014 and it is proposed that they are gradually phased in at different times over the next few years to ensure a smoother adaptation to the new rules. Ac-cording to the proposals, all the requirements are expected to be fully implemented in 2019. The proposals are now under negotiation at EU level between the European Commission, the member states and the European Parliament. Thus, it cannot be ruled out that the negotiations will result in changes to the present proposals.

STRICTER REQUIREMENTS IN SWEDENIn late 2011, the Swedish government, the 1 Corporate identity no.: 502007-7862

INTRODUCTION


Swedish Financial Supervisory Authority and the Riksbank (the Swedish central bank) published their views about how the new framework should be implemented in Sweden. The starting point is that Swedish banks need stricter minimum capi-tal requirements and that the regulations should be implemented more rapidly. The minimum requirement for core tier 1 capital may therefore, in addition to the proposed EU minimum level, also include a special new requirement for the largest banks. It is expected that the stricter capital requirements will be implemented in two stages – during 2013 and during 2015. Sweden also plans to apply a shorter implementation period than proposed by the EU.

In addition to higher capital requirements, as with the EU proposal, additional requirements may be made in the form of a discretionary countercyclical buffer.

HIGHER RISK WEIGHTINGS ON SWEDISH MORTGAGE LOANSIn addition to the proposed changes in capital requirements, the Swedish Financial Supervi-sory Authority has proposed that an average risk weight floor of 15 per cent is introduced for Swedish mortgage loans. This would be part of the overall capital assessment in the framework of the Authority’s supervision under Pillar 2.

The proposal means that banks must have a buffer capital for Swedish mortgage loans cor-responding to the difference between the risk weight in Pillar 1 and the risk weight floor in Pillar 2. The risk weights in Pillar 1 will not be changed which means that the risk weight floor will not affect the capitalisation level for the minimum requirements in Pillar 1.

It is important to point out that the Swedish Financial Supervisory Authority does not criticise the banks’ existing IRB models. The IRB models reflect the banks’ historical losses on mortgage loans and imply a correct calculation of the capi-tal requirement under Pillar 1. The extra capital requirement margin which the Swedish Financial Supervisory Authority now plans to implement will instead address risks which may have arisen on the Swedish housing and mortgage loan market in recent years and which are there-fore not fully reflected in the history on which the banks’ IRB models are based. Since the introduction of Basel II in 2007, Handelsbanken has taken account of this in its internal capital adequacy assessment and has thus from the outset kept considerably more capital for these exposures than is formally required according to Pillar 1. This is because the Bank’s capital as-sessment is based on calculations of economic capital and serious stress tests.

The current average risk weight for Handels-banken’s Swedish mortgage loans is some 5 per cent. The introduction of a risk weight floor of 15 per cent for these exposures as part of Pillar 2 would – based on volumes at 31 Decem-ber 2012 – involve an additional capital margin of approximately SEK 5.5 billion according to the Swedish Financial Supervisory Authority’s proposal. This is already covered by Handels-banken’s capital base. When – and if so, how – the Swedish Financial Supervisory Authority can introduce a risk weight floor and stricter capital requirements is the subject of ongoing negotia-tions at EU level.

NEW LIQUIDITY REGULATIONSIn the area of liquidity, a number of new regulations will be gradually introduced aiming to strengthen market financial stability. It is intended that Sweden will also implement these rules more rapidly than they are implemented internationally. The proposed Swedish regula-tions will apply from 2013 and contain a meas-urement of the Bank’s liquidity in the form of a short-term liquidity buffer – Liquidity Coverage Ratio (LCR). This measure is based on the LCR measure proposed internationally but it contains some deviations.

0

5

10

15

20

25

Tier 1 capital Total capital baseCore tier 1 capital

Current requirement, Sverige and EU

CRDIV/CRR* EU Sweden 2013 Sweden 2015 Handelsbanken Q4 2012*

Minimum requirement: 4.0%





Buffer: 2.5–5.0%




Buffer: 0.0–2.5%




Buffer: 0.0–2.5%


21.0%

18.0%

16.5%

*According to fully phased-in CRDIV/CRR

Proposed new capital requirements for Swedish banks

RISK MANAGEMENT


Risk managementAs in recent years, 2012 was characterised by financial stress and debt problems in several EU countries, which has contributed to the start of a recession. This has happened at the same time as a number of countries must tackle major structural problems and large parts of the financial sector must review their business models. Handelsbanken’s business model has stayed intact during a number of financial crises and recessions and has proved very resistant to external strains.

Once again, the financial markets were under substantial stress during the year. This stress is based on the inability of indebted countries to manage their structural imbalances at the same time as they and many other countries around the world need to handle the early stages of a reces-sion. Traditional solutions to resolve an economic downturn tend to exacerbate the structural imbalances. These external conditions affect the financial sector and also Handels banken, which, however, always strives to have low exposure to macro-economic risks. In addition to this there is still uncertainty regarding future regulations. Handelsbanken has no direct exposure to the troubled countries and has very limited other ex-

posures in these countries, but the stress on the financial markets also affects Handelsbanken’s home markets.

Handelsbanken’s historically low tolerance of risk, sound capitalisation and strong liquidity situation means that the Bank is well equipped to cope with substantially more difficult market conditions than those experienced during the year.

Handelsbanken’s strict approach to risk means that the Bank deliberately avoids high-risk transactions, even if the remuneration may be high at that time. The low risk tolerance is maintained through a strong risk culture that is sustainable in the long term and applies to

all areas of the Group. Lending has a strong local involvement, where the close customer relationship promotes low credit risks. Market risks in the banking operations are only taken as part of meeting customers’ investment and risk management needs and in conjunction with the Bank’s funding. The Bank’s liquidity situation is planned so that business operations are not restricted when the financial markets are disrupted.This strict approach to risk also enables the Bank to be a stable and long-term business partner for its customers. It contributes to good risk management and sustaining a high service level even when operations and the markets on

Loan losses as a percentage of lending 1999-2012

-0,2

0,0

0,2

0,4

0,6

0,8

1,0

1,2

2012201020082006200420022000

Handelsbanken

%

Other Nordic banks*

* For the period until 2000 inclusive, only Swedish banks are included.

Risks at Handelsbanken

Description

Credit risk Credit risk is the risk of the Bank facing economic loss because the Bank’s counterparties cannot fulfil their contractual obligations.

Market risk Market risks arise from changes in prices and volatilities in the financial markets. Market risks are divided into interest rate risks, equity price risks, exchange rate risks and commodity price risks.

Liquidity risk Liquidity risk is the risk that the Bank will not be able to meet its payment obligations when they fall due, without being affected by unacceptable costs or losses.

Operational risk Operational risk refers to the risk of loss due to inadequate or failed internal processes, people and systems, or external events. The definition includes legal risk.

Insurance risk The risk in the outcome of an insurance that depends on the insured party’s longevity or health.

Property risk The risk of changes in prices of the Bank’s property holdings.

Business risk The risk of unexpected changes in earnings that are not attributable to the risk categories described above.

Compensation risk Compensation risk is the risk of loss or other damage arising due to the compensation system.

Exposure to sovereign states with weak finances 31 December 2012, EAD, SEK m

Exposure class Greece Ireland Italy Portugal Spain

Sovereign - - - - 0

Institutions* 16 20 302 17 91

Corporate 8 202 259

Retail 29 25 45 20 202

Total exposure 45 53 549 37 552

Provisions (all exposure classes) - - - - -

*of which: EBA guarantees (Euro Banking Association clearing system) 15 10 30 15 35

Exposure to sovereign states with weak finances 31 December 2011, EAD, SEK m

Exposure class Greece Ireland Italy Portugal Spain

Sovereign - - - - -

Institutions* 27 45 267 29 308

Corporate - 5 201 1 278

Retail 6 21 53 15 210

Total exposure 33 71 522 46 796

Provisions (all exposure classes) - - - - -

*of which: EBA guarantees (Euro Banking Association clearing system) 27 18 54 27 134

RISK MANAGEMENT


which the Bank operates are subject to strain. The same principles for the Bank’s approach to risks apply in all countries where the Bank operates and they are guiding principles in the Bank’s future international expansion.

Throughout the fi nancial crisis, Handels-banken has had good access to liquidity. The Bank has access to the fi nancial markets via its short-term and long-term funding pro-grammes. The long-term funding programmes have been expanded in recent years and this process continued during the year. Handels-banken has issued a large number of senior and covered bonds in several currencies. It was the fi rst Swedish bank to issue covered bonds in Australian dollars. Handelsbanken is the fi rst bank since 2007 to issue a seven-year covered bond in the American market. The investor base has been broadened and there has been large demand from investors. The fact that this was possible during an ongoing fi nancial crisis shows the market’s confi dence in the Bank’s business model and its ability to

manage uncertain external conditions. Central Treasury’s liquidity portfolio, which is part of the Bank’s liquidity reserve, has a low risk profi le and consists mainly of government bonds and covered bonds. The total liquidity reserve provides a high degree of resistance to poss-ible disruptions in the fi nancial markets. At the year-end, the Bank’s liquidity reserve exceeded SEK 750 billion.

SEK 246 billion of the reserve consisted of liquid assets invested with central banks, SEK 114 billion were liquid securities and the remainder was mainly an unutilised issue amount for covered bonds at Stadshypotek. Liquidity reserves are kept in all currencies that are important to the Bank. The total liquidity reserve covers the Bank’s liquidity requirements in a stressed scenario for more than two years without access to new market funding. The composition of the liquidity reserve guarantees maintained operations for a period exceeding the Swedish Financial Supervisory Authority’s requirements according to the Liquidity Cover-

age Ratio (LCR) for all currencies in total and for US dollars and euros separately. Operations can also be maintained for a considerable period of time even in an extreme situation when the foreign exchange markets are closed.

The Bank’s capital situation was strength-ened during the year and its earnings have been stable. Coupled with low loan losses, this has contributed to the strong position. The low risk profi le of the credit portfolio has resulted in lower capital requirements for credit risks compared with other banks. The strong capital situation provides good protection insurance in the fragile macro-economic situation. The strong capitali-sation should be seen in light of future regulatory amendments regarding capital adequacy.

Handelsbanken is a universal bank, offering a wide range of various banking and insurance products. These entail a variety of risks that are systematically identifi ed, measured and man-aged in all parts of the Group.

The Bank’s total view of risk and capital manage-ment comprises the following components:

1. Business operations The Bank is characterised by a clear division of responsibility where each part of the business operations bears full responsibility for its busi-ness and for risk management. Those with the greatest knowledge of the customer and market conditions are best equipped to assess the risk and can also act at an early stage in the event of problems. Each branch and each profi t centre is responsible for dealing with any problems that arise. As a consequence, there are strong incentives for high risk awareness and for pru-dence in business operations.

2. Local risk controlThe accountability of the person taking a business decision is supplemented by local risk control in the regional banks and within the various business areas. This ensures that risk-taking does not become excessive in an individual transaction or in local operations, and that transactions are in line with the Bank’s views of risk-taking. The local risk control as-sesses risk, checks limits, etc. and verifi es that individual business transactions are document-ed and conducted in a manner that does not involve undesirable risks. The local risk control reports to Central Risk Control and also to busi-ness operations management.

3. Central risk control As business decisions become more decen-tralised, the need for central monitoring of the risk and capital situation increases. The central credit and risk functions are therefore a natural and vital component of the Bank’s business model.

The Central Credit Department prepares decisions made by the Board or by the Board’s credit committee. The Central Credit Depart-ment also ensures that credit assessments are consistent and that loans are granted in accordance with the credit policy decided by the board. The Central Credit Department is also responsible for identifying risks in all major individual commitments and offers support and advice to other areas of the credit organisation.

Central Risk Control has the task of identify-ing, measuring, analysing and reporting on all the Group’s material risks. It monitors that the risks and risk management comply with the Bank’s low tolerance of risks and that senior management has reliable information to use as a basis for managing risks in critical situa-tions. Central Risk Control also has functional responsibility for local risk control in the business areas and subsidiaries, for ensuring that risks are measured effectively and consistently, and ensuring that the Bank’s senior management receives regular reports and analyses of the current risk situation.

4. Capital planningIf – despite the work in the three components described – Handelsbanken were to suffer serious losses, it holds capital to ensure its survival both during and after extreme events. Capital planning is based on an assessment of the capital situation in terms of the legal capital requirement, combined with calculation of economic capital and stress tests. Stress tests identify the measures that need to be prepared or implemented in the future to ensure satisfac-tory capitalisation at any given time.

Apart from the formal risk organisation, Central Treasury is responsible for ensuring that the Group at any given time has satisfactory liquidity and is well prepared to quickly strengthen liquid-ity as needed. Central Treasury is also respon-sible for the Bank’s liquidity reserve. A liquidity report is issued daily to the CFO and regularly to the Bank’s Group Chief Executive and Board.

In addition, operations are reviewed by compliance – at central, business area and subsidiary level – and the internal and external auditors.

Handelsbanken’s risk management activities have stood the test of time and their effective-ness is illustrated by the fact that for a long time the Bank has had lower loan losses than its competitors and a stable fi nancial performance.

Handelsbanken’s risk management

Capital planning Central risk controlLocal

risk controlBusiness operations

RISK ORGANISATION


Risk organisationHandelsbanken’s Board is responsible for assessing and monitoring the risks arising in the Group’s operations. Central Risk Control – which reports to the CFO, the Group Chief Executive and the Board – has day-to-day responsibility for overall risk assessment.

Handelsbanken’s Board is responsible for as-sessing and monitoring the risks arising in the Group’s operations. The Board ratifies policy documents and instructions describing how various risks should be managed and reported. The Board also ratifies the decision structure for credit limits.

Central Risk Control – which reports to the CFO, the Group Chief Executive and the Board – has day-to-day responsibility for overall risk assessment. This responsibility entails ensuring that decision documentation regarding risk measurements and limits is prepared, and that fit-for-purpose information and reporting sys-tems are in place. Central Risk Control is also responsible for identifying and controlling the Group’s risks, for the models used to measure these risks, and for proposing risk reduction measures.

The Board determines the total market and liquidity risk limits for the entire Group within each type of risk. The limits are then allocated by the Group Chief Executive and the CFO. In each business area which has been allocated limits, a local risk control unit reports the risk exposure to Central Risk Control and also to the management of the business area.

The Group Chief Executive is responsible for the Bank pursuing capital planning which ensures that the Group’s supply of capital is secure. The Head of Capital Management is responsible for measuring available capital and for applying the Group’s capital planning policy. This includes responsibility for maintaining the correct level of available capital and the correct proportions of the various types of capital.

Central Treasury is responsible for group li-quidity and funding, and for carrying out the risk management measures that are decided upon by the Bank’s CFO.

REPORTING AND MONITORING OF RISK AND CAPITAL SITUATION The credit risk situation is reported quarterly to the Board in terms of volume growth, risk-reported credits, information from the Bank’s credit risk models, etc.

In addition to the reporting of loans with provi-sion requirements, which is carried out within the framework of external accounting, defaulted credits are reported regularly, to satisfy the information requirement of the internal credit risk model and the calculation of the capital requirement. Each branch also compiles a quarterly risk report, where it reviews its credit commitments to identify and report credits where the borrower’s repayment capacity is impaired and the Bank’s collateral is insufficient, or there is a risk that it will be insufficient. For each commitment where the risk is assessed to be higher than normal, a special action plan is established. Normally, problems are identified at an early stage and risk-limiting measures are taken before a commitment becomes non-performing. The risk reports are presented each quarter to the boards of the regional banks and subsidiaries and to the Board of the Bank.

The financial risks and limit utilisation for Han-delsbanken Capital Markets, the internal bank, the mortgage business and other operations which carry less market risk, are checked on a daily basis and summarised when neces-sary and at least weekly. Every month, there is an in-depth follow-up of the market risk and liquidity risk situation presented to the Bank’s risk committee chaired by the Bank’s CFO. Any overdrawn limits are reported to this committee, as well as the current risk situation in the various risk classes and for the Group as a whole. Cen-tral Risk Control reports the risk committee’s analyses and observations to the Group Chief Executive on a regular basis, and at least after each risk committee meeting. The risk situation and limit utilisation for market risks are reported to the Board at each ordinary board meeting.

The capital situation is reported weekly to the CFO and Head of Capital Management, based on a short-term capital forecast. In cases where certain thresholds are exceeded, or where, for any other reason, the Head of Capital Manage-ment or the CFO deems it appropriate, the mat-ter is reported to the Group Chief Executive. The capital situation for the medium and long term is summarised quarterly by the capital

committee. The forecast is fully updated quar-terly, and when there are significant changes in market conditions. A report is made quarterly to the Group Chief Executive and Board of the Bank and otherwise when necessary.

The liquidity risk is reported daily to the Bank’s management and to the Board at each ordinary board meeting. The liquidity commit-tee, which acts as an advisory unit to the Head of Central Treasury, meets every month before each ordinary board meeting and otherwise when necessary. At this committee meeting, reports are presented on the current liquid-ity situation, on results of stress tests and a scenario analysis, and other information which is relevant for the assessment of the Group’s liquidity situation.

Group Finance has a valuation committee with the task of creating conditions for correct valuation of recognised assets and liabilities. The valuation committee must ensure that inter-nal guidelines, instructions and applied models in the valuation are fit for purpose and comply with external regulations.

Operational risks are reported to the Board every six months. The report includes informa-tion regarding significant events, major losses and important proactive measures. The report also includes an aggregated risk assessment at Group level. Operational risks are monitored daily via reports concerning incidents which have occurred from branches and units throughout the Handelsbanken Group. In addition, proactive measures relating to the operations-related risk control are monitored and followed up in close collaboration with Central Risk Control.

CREDIT RISK


Credit riskHandelsbanken’s low risk tolerance is maintained by means of a strong credit policy and credit risk culture which covers the whole Group and is sustainable over time. The decentralised organisation with a local presence provides high quality in the credit decisions and ensures that the credit risk is managed close to the customer.

Credit risk is defi ned as the risk of the Bank facing economic loss as the result of the Bank’s counter-parties not being able to fulfi l their contractual obligations.

At Handelsbanken, the credit process is based on a conviction that a decentralised organisa-tion with local presence ensures high quality in credit decisions. The Bank aims to be a relation-ship bank where the branches maintain regular contact with the customer, which gives them an in-depth understanding of each individual customer and a continually updated picture of the customer’s fi nancial situation.

In the Bank’s decentralised organisation, the branch responsible for the customer has total credit responsibility. Customer and credit re-sponsibility lies with the branch manager or the employees at the local branch delegated by the manager. Most staff at branches have personal

decision limits allowing them to decide on credits to the customers they are responsible for. If there is a need for larger credits, there are regional and central decision levels. Each additional level of decision adds credit expertise. They have the right to reject credits both within their own decision level and also credits which would have been decided at a higher level. The larg-est credits are decided by the Board’s credit comm ittee, or by the entire Board, where cases are prepared by the Central Credit Department. However, no credit application may be pro-cessed in the Bank without the recommenda-tion of the branch manager.

The decision procedure for credits is illus-trated in the diagram below. It also shows the percentage of decisions and amounts at the various decision levels.

Decentralisation also means that the documentation that forms the basis for credit decisions is always prepared by the branch responsible for the credit, regardless of whether the fi nal decision is to be made at the branch, at regional level, in the Board’s credit committee or by the Board. Credit decision documenta-

tion includes general and fi nancial information regarding the borrower, and an assessment of the repayment capacity, valuation of collateral, loans and credit terms. For borrowers whose total loans exceed SEK 3 million, the credit deci-sion is made in the form of a credit limit (or SEK 6 million for residential mortgage loans for private individuals and SEK 12 million for loans to hous-ing co-operative associations with a mortgage in the property).

Credit limits granted are valid for a maximum of one year. When extending limits, the decision documentation and decision procedure are the same as for a new credit.In Handelsbanken’s decentralised organisation where a large proportion of the credit and limit decisions are made by individual branches, it is important that there is a well-functioning review process to ensure that the credit decision is of high quality. The branch manager examines the quality of the staff’s decisions and the regional credit departments examine the quality of deci-sions made by branch managers. The purpose of the quality review is to ensure that the Bank’s credit policy and internal instructions are

The credit process and decision levels in Handelsbanken

Distribution of limit decisions

Proportion of number of limits 70% 28% 2%

Proportion of limit amount 6% 21% 73%

BRANCH LEVEL REGIONAL LEVEL CENTRAL LEVEL

ProposalAccount manager

Branch manager

Regional credit specialist

Regional credit committee

Regional board

Central Credit Department

Central Board credit com-mittee

Central Board Decision

CREDIT RISK


complied with, that credit quality is maintained, and that credit decisions show that there is good credit judgement and a sound business approach. A corresponding examination of the quality is also made for credit decisions made at higher levels in the Bank. Credits granted by regional credit committees and regional bank boards are examined by the Central Credit Department, which also prepares and examines credits decided by the Bank’s Central Board or its credit committee.

Rather than being a mass market bank, Handelsbanken is selective in its choice of cust-omers. Borrowers must be of high quality. The quality requirement is never neglected in favour of higher credit volumes or to achieve higher returns. The Bank also avoids participating in financing where there are complex customer constellations or complex transactions which are difficult to understand.

The local branch’s close contact with its customers also enables the branch to quickly identify any problems and take action. In many cases, this means that the Bank can take action more rapidly than would have been possible with a more centralised management of problem loans. The branch also has full financial responsibility for granting credits, and therefore addresses problems that arise when a customer has repayment difficulties and also bears any loan losses. If necessary, the branch obtains support from the regional head office and central departments. The Bank’s method of working means that all employees whose work involves transactions linked to credit risk acquire a solid and well-founded approach to such risks. This approach forms an important part of the Bank’s culture.

MEASUREMENT OF CREDIT RISKS Since 2007, the Bank has had permission from the Swedish Financial Supervisory Authority to calculate the capital requirement for credit risk using the IRB approach. The permission applied to the banking group led by Svenska Handels-banken AB (publ) and the two companies Svenska Handelsbanken AB (publ) and Stads-hypotek AB (publ). The Bank has since applied for and received equivalent permission for Handelsbanken Finans AB and Handelsbanken Rahoitus Oy. Certain exposures in the subsidiar-ies Handelsbanken S.A. in Luxembourg, ZAO Svenska Handelsbanken in Russia (in liquida-tion) and Handelsbanken Finans (Shanghai) Financial Leasing Co Ltd are reported according to the IRB approach.

The Swedish Financial Supervisory Authority has also granted time-limited and permanent exceptions from application of the IRB approach for certain exposures, for which the standard-ised approach will be used instead. The permitt-ed permanent exception refers to exposures to sovereigns, the Riksbank (the Swedish central bank) and Swedish municipalities. Time-limited exceptions comprise portfolios of insignificant size as defined in the Financial Supervisory Authority’s regulations as well as the equity exposures held by the Bank at the turn of the year 2007/2008. The portfolio in Handels-banken Fonder AB is attributable to portfolios of insignificant size.

In 2012, reporting according to the IRB approach comprised the portfolios in the Swed-ish regional banks, Regional Bank Norway, Regional Bank Finland, Regional Bank Denmark, Handelsbanken Finans in Sweden and Finland, major parts of the regional banks in the UK, the

Bank’s exposures to other banks (institutional exposures) and large parts of the Handels-banken International and Handelsbanken Capital Markets business areas.

In 2010, Handelsbanken received permission from the Swedish Financial Supervisory Authority to report certain portfolios using the advanced IRB approach. The permit refers to counterpar-ties which are categorised as medium-sized companies, property companies and housing co-operative associations. In 2012, a supple-mentary application was submitted to the Supervisory Authority concerning Large corpo-rates. The exposures that have been approved for reporting according to the IRB approach but not yet for the advanced approach, will be reported according to the foundation approach for the time being.

At the end of 2012, the Bank calculated the capital requirement using the IRB approach for about 89 (90) per cent of total risk-weighted as-sets, calculated according to the Basel II rules. 61 (58) per cent of the corporate exposures reported according to the IRB approach were reported using the advanced approach.

Approach

Business area

Regional Banks in the Nordic countries* Regional Banks UK* Handelsbanken International*,

Standardised Approach

Sovereign exposures

“Insignificant portfolio” according to FI approval

Sovereign exposures


Retail exposures

Sovereign exposures


Foundation IRB Approach

Corporate exposures/large corporates

Corporate exposures

Institutional exposures

Exposures without a counterparty

Equity exposures


Corporate exposures



Equity exposures




Equity exposures

Securitisation positions

Advanced IRB Approach

Corporate exposures (medium-sized companies, property companies, housing co-ops)

Retail exposures

Corporate exposures (medium-sized companies, property companies, housing co-ops)

* May include legal entities in addition to the parent company (Handelsbanken Stadshypotek, Handelsbanken Finans, Handelsbanken Capital Markets and others).

Calculation of credit risks broken down by method and business area, 2012

CREDIT RISK


RISK RATING SYSTEM Handelsbanken’s risk rating system comprises a number of different systems, methods, pro-cesses and procedures to support the Bank’s classification and quantification of credit risk.

Handelsbanken’s internal rating system is used to measure the credit risk in all operations reliably and consistently. The risk rating builds on the Bank’s internal rating, which is based on an assessment of each counterparty’s repay-ment capacity. The rating is determined by the risk of financial strain and by the assessed resistance to this strain. The method and clas-sification are based on the rating model that the Bank has applied for several decades.

The internal rating is the most important com-ponent of the Bank’s model for calculating the capital requirement under the Basel II rules (the IRB approach). The rating is dynamic; it is reas-sessed if there are signs that the counterparty’s repayment capacity has changed. The rating is also reviewed periodically as stipulated in the regulations. The rating is made by the person responsible for granting the credit and it is sub-sequently checked by independent bodies.

EXPOSURE CLASSES One of the basic premises of the capital adequacy regulations is that the institution’s exposures are categorised into the exposure classes stipulated by the regulations. The number of exposure class-es depends on the method used to calculate the credit risk. Exposures to be calculated according to the standardised approach can be allocated to 15 different exposure classes, while there are 7 exposure classes in the IRB approach.

The Bank uses different models for calculating credit risk depending on the type of exposure.

The overall division into exposure classes in the IRB model comprises sovereign, institu-tional, corporate, retail and equity exposures, as well as positions in securitisations. In addition there are also exposures without counterparties – assets where no performance is required from a counterparty.

Some exposure classes contain sub-groups in which special models are applied. In practice, the division into exposure classes and sub-groups is made when the employee at a branch or unit responsible for the customer decides which business assessment template is to be used when assigning the counterparty a rating.

Exposures to states, central banks, govern-ment agencies and municipalities are classed as sovereign exposures. Exposures to institutions

refer to exposures to counterparties defined as banks and other credit institutions, and certain investment firms.

Retail exposures include both exposures to private individuals and to sole traders, where the total exposure within the Group does not exceed SEK 5 million. Also included are compa-nies that are legal entities with a maximum turn-over of SEK 50 million, where the total exposure within the Group does not exceed SEK 5 million (excluding mortgage loans). Retail exposures are subdivided into two groups: property credit and other retail exposures.

Corporate exposures refer to exposures to non-financial companies, consisting of legal entities with a total exposure within the Group in excess of SEK 5 million or where the company’s turnover is more than SEK 50 million, and sole traders with a total exposure for the Group in excess of SEK 5 million. Apart from ordinary non-financial companies, the exposure class includes insurance companies, housing co-operative associations and exposure in the form of “specialised lending”. The Bank’s corporate exposures to counterparties which are property companies, housing co-operative associa-tions or medium-sized companies have been reported according to the advanced approach since 31 December 2010 inclusive, while other corporate exposures are reported according to the foundation approach for the time being.

Equity exposures refer to the Bank’s holdings of shares that are not in the trading book. For equity exposures held by the Bank at the year-end 2007/2008, the risk weight during 2012, in accordance with the Swedish Financial Supervi-sory Authority’s transitional rules, was calculated using to the standardised approach. However, these exposures are reported as IRB exposures. New equity exposures after this date have been calculated according to the IRB model.

For division into exposure classes according to the standardised approach, the Bank’s vol-umes are put into the following exposure classes: sovereign and central banks, municipalities, institutions, retail, exposures with collateral in property, non-performing items and other items. Non-performing items in the standardised approach are exposures where overdue interest or principal amounts have remained unpaid for more than 90 days, calculated from the original contracted payment date. Other items include prepaid costs, holdings in equities, cash in hand and unminted gold.

RISK CLASSIFICATION METHODSTo quantify its credit risks, the Bank calcu-lates the probability of default (PD), the Bank’s exposure at default (EAD), and the proportion of the loan that the Bank would lose in the case of default (loss given default – LGD). Default is de-fined as when the counterparty is either 90 days late in making payment, or when an assessment has been made that the counterparty will not be able to pay as contractually agreed, for example, if declared bankrupt.

The PD value is expressed as a percentage where, for example, a PD value of 0.5 per cent means that one borrower of 200 with the same PD value is expected to default within one year. A credit in default does not necessarily mean that the Bank will incur a loss since in most cases there is collateral for the exposure. Nor does a default mean that it is out of the question that the coun-terparty will pay at some time in the future.

For corporate and institutional exposures, the internal rating set for each counterparty is directly converted into a risk class on a scale between 1 and 10 (where risk class 10 refers to defaulted counterparties). A certain average PD is calculated for each risk class. For exposures to large companies and institutional exposures, standardised values prescribed by the Swedish Financial Supervisory Authority’s regulatory code are applied to the loss given default (LGD). The standardised value that may be used is determined by the collateral provided for each exposure.

For retail exposures, the risk class is also based on the internal rating assigned to all credit customers. The rating is not translated directly into a risk grade as for corporate exposures; instead, the different exposures are sorted into a number of smaller groups on the basis of certain factors. Such factors include the type of credit, the counterparty’s debt-servicing record and whether there are one or more borrowers. An average probability of default is calculated for each of the smaller groups, and on the basis of this, the groups are sorted into one of the ten risk classes. Different models are used for exposures to private individuals and to small companies respectively (that are also classed as retail expo-sures), but the principle is the same.

For retail exposures and exposures to medium-sized companies, property companies and housing co-operative associations, the loss given default (LGD) is determined by the Bank’s own loss history. Different values are applied to retail exposures with collateral in property in

CREDIT RISK


Sweden, and for property exposures to medium-sized companies, property companies and housing co-operative associations depending on the loan-to-value ratio of the exposure. For other exposures, the LGD value is determined by factors that may depend on the existence and valuation of collateral, the product and similar factors.

For each class of exposure, the average prob-ability of default (PD) is calculated for each of the nine risk classes that refer to non-defaulted counterparties or agreements. Probability of default is based on calculations of the historical percentage of defaults for different types of exposure. The average PD is then adjusted by a safety margin and a business cycle adjust-ment factor. The safety margin is intended to ensure that the probability of default is not underestimated. The business cycle adjust-ment factor takes into account the fact that the measured probability of default per risk class can be expected to vary due to the business cycle. The measured probability therefore needs to be adjusted in relation to where in the business cycle the Bank’s borrowers were in the period on which the calculations are based in order to reflect a long-term probability of default which must be used for the risk weighting. The business cycle adjustments are based on the Bank’s internal history from 1985 to 2012 and these become less pronounced the longer there is historical information available for calculating the historical average per risk class.

Handelsbanken’s method for business cycle adjustment is intended to even out business cycle fluctuations in the PD at risk class level. The means that the PD per risk class will be less volatile over time and that the PD at counter-party and portfolio level varies in association with some counterparties being assigned a changed rating in the case of strong business cycle variations. However, Handelsbanken’s internal rating of a counterparty is so long-term that the PD at counterparty and portfolio level is expected to be stable during a normal business cycle.

When calculating the LGD, the risk measure must reflect the loss proportion during economi-cally unfavourable circumstances, known as a downturn LGD. For collateral in property, the downturn LGD is based on observed losses from the property crisis in the early 1990s. For other collateral relating to retail exposures, observed LGD is adjusted for downturns by a factor which depends on the PD and type of product. For corporate exposures in the IRB advanced approach, the LGD is adjusted for downturns so that the Bank’s observed losses in 1991–92 can be explained by the risk weights with a good margin.

When the exposure at default (EAD) is to be calculated, certain adjustments are made to the carried exposure. This applies predominantly to various types of commitments where exposure may increase without any active decision by the Bank. Examples of this are committed loan offers or revolving credits, where the Bank agrees with the customer that the customer may borrow up to a certain amount in the future. This type of commitment constitutes a credit risk that must also be covered by adequate capital. Nor-mally this means that the credit granted is ad-justed using a certain conversion factor (CF) for the part of the credit that is unutilised. For certain product categories for corporate exposures and institutional exposures, the conversion factors are determined by the regulatory code, while for retail exposures and certain product categories for medium-sized companies, property com-panies and housing co-operative associations, the Bank uses its own calculated conversion factors. Here, it is the product referred to that mainly governs the conversion factor, but other factors may also be of relevance.

In addition to the capital adequacy calcula-tion, measures of risk (PD, EAD, LGD) are used to calculate the cost of capital in each individual transaction and to calculate economic capital (EC). New credits that are assessed to involve higher than normal risk are refused, regardless of the price and regardless of the collateral available. The method used means that the Bank’s historical losses have a direct impact on risk calculations and capital requirements, which contributes to the positive outcome for the Bank of the Basel II regulations compared with Basel 1.

For corporate, institutional and retail ex-posures, the adjoining figures show how the exposure is distributed between bonds and other interest-bearing securities, and loans, derivatives and other products respectively. The diagrams show how the exposures (EAD), excluding credits in default, are distributed be-tween different PD ranges in each counterparty category. Exposures within a certain range are shown in terms of the distribution between loans, interest-bearing securities, derivatives and other types of product. Other products are, for example, guarantees and committed loan offers. The PD values used are those applied for the statutory capital requirement. This means that margins in the form of business cycle adjustments and safety adjustments in the PD values are also included in the calculations of economic capital, which means that the loss levels that the PD values imply are conservative.

Proportion of exposure per product type per PD interval excluding defaulted credits – Corporate exposures

Proportion of exposure per product type per PD interval excluding defaulted credits – Institutional exposures

0

5

10

15

20

25

30

35

>1.000.60–1.000.30–0.600.05–0.30<0.05

Derivatives Loans

Interest-bearing securities Other products

Proportion of exposure, %

PD,%

0

5

10

15

20

25

30

35

40

>1.000.60–1.000.30–0.600.05–0.30<0.05 PD,%

Derivatives Loans



Proportion of exposure per product type per PD interval excluding defaulted credits – Retail exposures

0

10

20

30

40

50

60

>1.000.60–1.000.30–0.600.05–0.30<0.05 PD,%

Derivatives Loans



CREDIT RISK


Comparisons with external ratings The Bank’s risk classes are not directly com-parable with the ratings applied by external credit rating agencies. The agencies’ ratings do not correspond to a direct classification of the probability of the counterparty defaulting, as the Bank’s rating model does. In addition, the rating agencies vary in the extent to which they factor in the seriousness of the losses that default can lead to. The time horizon within which credit-worthiness is assessed is not always the same for the Bank as it is for the rating agencies. The Bank’s risk classes do not state a uniform scale, whereby a certain risk class always corresponds to a certain probability of default. Furthermore, different PD scales are applied to different parts of the credit portfolio and the PD values change over time, depending on business cycle adjust-ment factors and developments in the model, for example.

In the table below, the 25th and 75th percen-tiles are shown in the distribution of internal risk categories based on the external credit rating. This reflects the interval of normal internal risk classes for the various external credit ratings.

Quality assurance of the credit risk model The Bank carries out a detailed annual review of its internal rating model. The review checks that the internal ratings on which the Bank’s risk classification is based are applied in a consist-ent, correct and fit-for-purpose manner (evalu-ation) and also that the statistical models used measure risk satisfactorily (validation).

The purpose of evaluating internal ratings is to ensure that they function well as the central fac-tor in the risk classification of the Bank’s coun-terparties. For example, the analysis includes evaluating whether the rating reflects the risk in

the counterparty, that customers are assessed equally regardless of where in the Bank the rating takes place, that the rules for rating are followed and that ratings are updated. The evaluation may highlight ratings in certain parts of the Bank or for certain types of counterparty, with measures being taken to remedy any deficiencies. Such measures may include more frequent, specifi-cally targeted follow-up action, changes to rating instructions or adaptations to models.

The statistical models and risk measure-ments on which these are based are validated at least annually. The validation aims to ensure that the risk classification system satisfactorily measures the risk in the different risk dimen-sions PD, LGD and EAD. They are primarily assessed to ascertain whether the outcomes observed during the past year confirm that the models applied by the Bank function as intend-ed. To achieve this, a number of statistical tests are used with pre-defined threshold values, so that if there are deficiencies in the models, clear signals are given. The validation may neces-sitate changes to models, risk measurements or instructions.

The results of the evaluations and validations are reported to the Bank’s Board and audit committee and are examined by the Swedish Financial Supervisory Authority.

The table below shows the values applied (predictions) and the outcome for 2012 for the various dimensions of risk. The year’s provisions for probable loan losses and actual losses for defaults in 2012 are also shown so that a com-parison can be made between the losses the model implies and the actual losses the Bank has had for these exposures in 2012. The LGD outcome for 2012 refers to average (exposure-weighted) realised losses for retail agreements

that defaulted in 2010 with a 24-month recovery period, and corporate counterparties (includ-ing large companies and institutions) that defaulted in 2011 with a 12-month recovery period. In both cases, provisions remaining at the end of the recovery period are included in the loss definition. The PD outcome states the proportion of healthy retail agreements and corporate counterparties at the start of 2012 that defaulted in 2012.

For the expected loss (EL), the total EL is shown for the exposures in approved IRB mod-els as at 31 December 2011, broken down by exposure class. The EL for defaulted exposures is proportionally very high since their PD is 100 per cent. The table shows EL both including and excluding defaulted exposures. For PD and LGD, the average value of the IRB-approved exposures is shown, both for the value used in the models in 2012 and for the actual outcome in 2012. The average of EL and LGD is weighted according to the exposure volume, while PD is weighted according to number. The PD values shown here are those applied in the capital adequacy report, thus including both security margins and the business cycle adjustment factors.

The expected loss presented here does not in fact, despite its name, represent the most likely loss level for the Bank. One reason for this is that the PD values used according to the regula-tions are to correspond to a long-term average. 2012 was a year when defaults could have been expected to exceed the long-term average. Another reason is that a number of adjust-ments are made to the value calculated using the Bank’s IRB model. The main aim of these adjustments is to ensure that the Bank’s internal model does not underestimate the actual risk.

Relationship between external and internal rating for jointly rated customers, 2006–2012

Corporate exposures, Large corporates Institutional exposures

External rating (Moody’s)Internal risk class

25th percentileInternal risk class



75th percentile

Aaa 1 1 1 1

Aa 1 2 1 2

A 2 3 3 3

Baa 3 4 3 5

Ba 4 5 5 6

B 6 7 6 7

Caa-C 7 8 7 9

CREDIT RISK


Predictions and outcome for risk parameters in the IRB model, 2011

%

EL PD LGD

Excluding defaults

Including defaults

Loan losses and provisions for defaults 2011

(proportion of total EAD)2

Prediction for 2011

Outcome 2011

Prediction for 2011

Outcome 2011

Exposure class

Corporate1 0.17 1.48 0.07 0.88 0.87 34 20

Retail, property 0.04 0.06 0.01 0.24 0.34 13 3

Retail, other 0.36 0.98 0.10 1.31 1.48 27 17

Institutions 0.03 0.21 0.00 0.87 0.00 27 0

Total, all 0.15 0.90 0.05

1 Predictions reflect IRB-A for medium-sized companies, property companies and housing co-operative associations.2 Handelsbanken Finans excluded.

Predictions and outcome for risk parameters in the IRB model, 2012

%

EL PD LGD

Excluding defaults

Including defaults

Loan losses and provisions for defaults 2012

(proportion of total EAD)2

Prediction for 2012

Outcome 2012

Prediction for 2012

Outcome 2012

Exposure class

Corporate1 0.13 0.45 0.08 0.77 0.84 33 12

Retail, property 0.04 0.07 0.01 0.31 0.37 13 2

Retail, other 0.32 1.10 0.11 1.22 1.39 28 16

Institutions 0.02 0.02 0.88 0.00 21 0

Total, all 0.11 0.33 0.05

The adjoining diagram shows how these adjust-ments affect the calculated value for expected losses. Apart from these adjustments, the risk is further overestimated since the LGD and CF for large corporate exposures are determined by the regulations in the foundation approach and these are considerably more conservative than the expected value.

The adjoining diagram also shows the EL for all IRB-approved exposures, excluding defaulted exposures. The first column shows the observed EL value: EL based on the outright estimate of PD and LGD, which is approximate-ly 0.06 per cent. Since parts of the corporate exposures have been calculated according to the advanced approach since 1 January 2011, EL will be lower than previously, since the risk estimates to a greater extent reflect the internal loss history. The next columns show how EL is affected when the security margins, business cycle adjustments and regulatory “floor” levels are introduced.

The purpose of the safety margin is to ensure that the value applied does not underestimate the true risk because the statistical data on which the models are based is not sufficiently comprehensive. The business cycle adjustment takes into account the fact that the estimated probability of default and the loss can be expected to vary due to the business cycle. The probability of default and loss proportion used

for risk weighting therefore need to be adjusted in relation to where in the business cycle the Bank’s borrowers were in the period on which the calculations are based. The final column shows the EL calculated using the approved IRB approach. It is approximately 0.11 per cent of the exposure.

The diagram excludes the capital require-ment for defaulted credits. EL excluding de-faulted exposures shows a more likely level for the Bank’s losses than EL including defaulted exposures. This level is also considerably closer to the Bank’s net loan loss ratio calculated for defaults in 2012, namely 0.05 per cent.

In addition to evaluations and validations, In-ternal Audit also comprises an important part of the process. It examines the risk rating system, its components and its application on a regular basis. The way the Bank calculates, rates and quantifies risks, and validates the models used for the calculations, has also been an impor-tant part of the Swedish Financial Supervisory Authority’s review in conjunction with approval of the Bank’s application of the IRB approach. The Swedish Financial Supervisory Authority’s super-vision of the Bank includes regular monitoring of how the Bank’s application of the IRB approach is progressing. Within the framework of its over-all capital assessment, the Swedish Financial Supervisory Authority confirmed the application of the IRB approach as the starting point.

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

%

Base-

EL+L

GD sec.m

arg.

+LGD d

ownt

urn a

dj.+P

D sec.m

arg.

+PD b

us.cy

cle ad

j.=A

pplie

d

Breakdown of EL for all IRB-approved exposures excluding defaulted exposures

CREDIT RISK


COLLATERAL When Handelsbanken assesses the credit risk of a specific customer, the assessment must start with the borrower’s repayment capacity. According to the Bank’s credit policy, weak re-payment capacity can never be compensated for by being offered good collateral. Collateral may, however, substantially reduce the Bank’s loss if the borrower cannot fulfil his or her obligations. Credits must therefore normally be adequately secured.

Unsecured credit is mainly granted to custom-ers with very good repayment capacity. In these cases, special loan conditions are generally drawn up that entitle the Bank to renegotiate or terminate the agreement if the borrower’s repay-ment capacity deteriorates or if the conditions are otherwise violated.

Since collateral is not generally utilised until a borrower faces serious repayment difficul-ties, the valuation of collateral focuses on the expected value of the collateral in the case of a rapid sale in unfavourable circumstances in connection with insolvency. The value of certain assets may change considerably in an insolvency situation leading to a forced sale.

A large part of lending to credit institutions consists of reverse repos. A reverse repo is a repurchase transaction in which the Bank buys fixed-income securities or equities with a spe-cial agreement that the security will be resold to the seller at a specific price on a specific date. Handelsbanken regards reverse repos as secured lending.

In special circumstances, the Bank may buy credit derivatives or financial guarantees to hedge the credit risk in claims, but this is not part of the Bank’s normal lending process.

Credit risk exposure on balance, collateralSEK m 2012 2011

Residential property 1 961 955 905 610

Other property 240 895 210 943

Sovereigns, municipalities and county councils 339 171 465 047

Guarantees 18 698 17 191

Financial collateral 89 458 73 374

Collateral in assets 20 115 20 869

Other collateral 57 798 59 882

Unsecured 287 854 342 666

Total credit risk exposure on balance 2 015 944 2 095 582

¹ Including housing co-operatives.

Loans to the public, collateralSEK m 2012 2011

Residential property 1 961 955 905 610

Other property 240 895 210 943

Sovereigns, municipalities and county councils 81 404 61 170

Guarantees 18 639 17 027

Financial collateral 26 328 10 234

Collateral in assets 20 114 20 869

Other collateral 57 798 59 882

Unsecured 273 346 305 393

Loans to the public 1 680 479 1 591 128

¹ Including housing co-operatives.

Collateral which reduces the capital requirement Collateral for the exposures that are IRB-approved is managed according to two different calculation methods: IRB foundation approach or IRB advanced approach. Collateral affects the capital requirement in different ways in these two approaches. In the foundation approach, only certain types of collateral are eligible and the estimates for LGD and CF are applied as prescribed in the regulations. The Bank does however accept other types of collateral than those considered eligible under the capital adequacy regulations.

When reporting according to the advanced approach, the Bank applies its own calculated LGD estimates per collateral type. For the exposures approved for reporting according to the advanced approach during 2010, it has been possible to use most types of collateral occurring in the Bank to reduce the capital requirement.

Since collateral affects the capital require-ment to a greater extent following the imple-mentation of the advanced approach, there is a greater incentive for the Bank to reduce the credit risks as far as possible by acquiring collat-eral. The Bank follows up and regularly updates the market values for the collateral used in risk mitigation. A control procedure is established, whereby the market value of residential proper-ties is checked at least every third year and that of any other type of property is checked every year. For properties with an exposure exceeding EUR 3 million, a new valuation by an independ-ent valuer is made at least every third year.

In accordance with permission from the Swedish Financial Supervisory Authority, the

Bank uses volatility adjustments (haircuts) when calculating capital requirements according to the IRB foundation approach for exposures that are secured by financial collateral. This means that in its capital requirement calculations, the Bank adjusts the value of financial collateral based on the historical volatility of the financial collateral instead of using the standardised volatility adjustments otherwise prescribed by the regulations. This method allows for better risk measurement when using financial collateral and has a greater impact on reduction of the capital requirement. Handelsbanken regularly monitors the concentration risk in individual securities.

An advanced approach is used for retail ex-posures, where the exposures are categorised into various groups, partly based on the exist-ence of collateral. For certain types of property collateral, a segmentation is made based on the loan-to-value of the collateral. The LGD of the exposure is established on the basis of these groups.

For corporate exposures and institutional ex-posures where the Bank has eligible collateral, the capital requirement is reduced through an adjustment of either the PD or the LGD. The PD is adjusted in cases where there are approved protection providers, for example the issuer of a guarantee or surety as for own debt, with a lower PD value than the borrower. For other types of collateral the LGD is adjusted.

Handelsbanken has also entered into a large number of netting agreements with, for example, institutional counterparties, thus reducing the exposure. Information concerning the netting effect is presented in the section on counterparty risk.

CREDIT RISK


IRB-approved exposuresFor capital requirement calculation of corporate exposures, property mortgages correspond to approximately 44 (40) per cent of the reported exposure amount. The equivalent figure for financial collateral mainly in the form of repos is about 3 (1) per cent and it is some 8 (9) per cent for guarantees and other collateral. The remaining exposure amount is included in the capital requirement calculation as unprotected exposure.

For retail exposures, mortgages on property – mainly residential – correspond to around 86 (85) per cent of the reported exposure amount. Of the remaining exposure amount, roughly 1 (1) percentage point is categorised as having some form of collateral, while the remaining 12 (12) percentage points are set an LGD value due to other terms. These terms are chiefly determined by factors such as the type of borrower, type of credit or number of borrowers.

For institutional exposures, financial collateral covers some 62 (54) per cent of the reported exposure amount. The corresponding figure for guarantees is approximately 2 (2) per cent. The remaining exposure amount is included in the capital requirement calculation as unprotected exposure. Of the exposures that are covered by guarantees, totalling SEK 104,514 million (107,089), SEK 78,654 million (84,545) relates to guarantees from states and municipalities, SEK 1,313 million (2,436) relates to guaran-tees from institutions, and SEK 24,547 million (23,108) relates to guarantees from companies. Companies that are approved as guarantors in the calculation of capital requirements ac-cording to the IRB method are of risk class 4 or better.

In cases where an approved collateral value for the capital adequacy calculation does not cover the total exposure, a unique capital re-quirement is calculated per collateral. The same

calculation is also carried out for the unpro-tected part of the exposure.

Exposures calculated according to the standardised approachFor exposures reported in the institutional, cor-porate and retail exposure categories according to the standardised approach, and exposures secured by property, collateral totals about 41 (38) per cent of the reported exposure amount, of which approximately 7 (11) percentage points refer to guarantees.

For all exposures calculated using the standardised approach, the regulations state a risk weight based on the exposure class of the counterparty. The risk weight multiplied by the exposure amount gives the risk-weighted exposure amount.

Acceptable collateral which reduces the capital requirement, IRB-approved exposures 2012 2011

SEK m Type of collateral

Exposure amount covered by

collateralProportion of total

exposure (%)



exposure (%)

Corporate exposures - Guarantees 99 017 8 100 952 9

- Receivables 2 472 0 2 869 0

- Financial collateral 34 415 3 15 912 1

- Property 522 725 44 467 151 40

Retail exposures - Guarantees 115 0 90 0

- Residential property1 673 190 86 650 732 85

Institutional exposures - Guarantees 3 265 2 3 377 2

- Financial collateral 85 688 62 90 348 54

- Property 0 0 2 0

Securitisation positions - Guarantees 2 117 54 2 670 53

Total IRB 1 423 004 67 1 334 103 641 Including housing co-operatives.

Collateral which reduces the capital requirement, exposures calculated according to the standardised approach 2012 2011

SEK m Type of collateral



exposure (%)



exposure (%)

Sovereign & central banks - Financial collateral 12 494 4 3 284 1

Institutions - Guarantees 39 1 0 0

- Financial collateral 60 1 12 0

Corporate - Guarantees 6 385 16 8 735 21

- Financial collateral 305 1 331 1

Retail - Guarantees 0 0 3 0

- Financial collateral 650 5 1 327 10

Collateral in property - Property 28 018 100 19 036 100

Total standardised approach 47 951 11 32 728 6

CREDIT RISK


Loan-to-value for property lending For property financing, like all granting of credit, the borrower must have a good repayment capacity.

The below recommendation concerning maximum loan-to-value ratios (LTV) for property financing applies to the whole Handelsbanken Group. The LTV is based on the market value.

operative associations, 75 per cent.

-ties, 75 per cent.

The recommended LTVs correspond to what is applied at Stadshypotek. LTVs which exceed the recommendations are never permitted at Stadshypotek.

For loans in the Bank, LTVs which exceed the recommendations may occur but must be specially justified.

The value of industrial and warehouse prop-erty and undeveloped land may be much more volatile than for other property, partly due to the location, alternative use etc. The LTV should

LTV for property lending, Stadshypotek Sweden, mortgages specified by property, private and corporate market, 31 December 2012

2012 2011

Private market % Corporate market % Total Private market % Corporate market % Total

0–40% 65.0 81.0 70.4 66.0 80.6 70.8

41–60% 20.8 15.7 19.1 20.6 15.9 19.1

61–75% 10.1 2.9 7.7 9.8 3.1 7.6

>75% 4.1 0.4 2.8 3.6 0.4 2.5

LTV-Max 64.5 44.6 57.8 63.2 44.4 57.0

LTV-Mid 33.0 23.3 29.7 32.3 23.2 29.3

LTV-Max The highest loan-to-value of the property is weighted according to the principal debt.LTV-Mid The collateral level distribution of the property is weighted according to the principal debt within the collateral level interval.

Total Private market Corporate market

0

100

200

300

400

500

600

700

800

LTV %

Lending volumeSEK bn

>1001009080706050403020100

Lending volume broken down by LTV, Stadshypotek, Sweden 31 December 2012

0

20

40

60

80

%

Commercial property Residential propertyHousing co-ops

Prop

ortio

n >4

0Pr

opor

tion

40–5

0Pr

opor

tion

50–6

0Pr

opor

tion

60–7

0Pr

opor

tion

70–8

0

Prop

ortio

n 90

–100

Prop

ortio

n 80

–90

Prop

ortio

n <1

00

Distribution of corporate exposures by LTV (LTV mid), and property type, regional banks

0

20

40

60

80

100

LTV >60%LTV 41–60%LTV <40%

%

31 December 2012. LTV-Mid 29.7%

31 December 2011. LTV-Mid 29.3%

Proportion of loan volume, distributed by LTVs (Stadshypotek Sweden)

The lending in one property can occur in several intervals.

therefore be well below 60 per cent. Financ-ing of industrial and warehouse property and undeveloped land is only permitted in the Bank, i.e. this type of property is not eligible for loans from Stadshypotek.

Property lending at Stadshypotek, Sweden Stadshypotek’s lending takes place through Handelsbanken’s branch network. A co-operation agreement regulates the overarching relationship between the parties.

According to the Handelsbanken Group’s credit policy, weak repayment capacity can never be accepted on the grounds that good collateral has been offered to the Bank. Collateral may, however, substantially reduce Stadshypotek’s loss if the borrower cannot fulfil his/her commitments towards Stadshypotek. Credits in Stadshypotek must therefore always be satisfactorily secured by mortgages in prop-erty or a co-operative apartment. Unsecured loans are only granted to governments or municipalities or in cases where such bodies assume responsibility for the loan.

The tables below show the total loan volume broken down into loan-to-value ratios (LTV) for Stadshypotek’s Swedish property lending. An accumulated distribution of the LTVs as at 31 December 2012 is also presented. The graph shows that a very heavy fall in prices of property would be required for large parts of the lending volume to exceed a 100 per cent LTV.

Loan-to-value is lending as a proportion of the market value of the collateral. The calcula-tion takes account of any pledging with other credit institutions. The latest valuation is mainly used as the market value when compiling the LTVs. Handelsbanken continuously checks the market values for properties: residential proper-ties at least every three years and commercial properties every year. In addition to allocating the loan volume into LTVs, the average LTV is calculated by two different methods at Stadshy-potek: LTV Max where the property’s highest LTV is weighted according to the principal debt, and LTV Mid where the collateral level distribu-tion of the property is weighted according to the principal debt within the collateral level interval.

CREDIT RISK

16 HANDELSBANKEN | RISK OCH KAPITALHANTERING 2012

The risk in Handelsbanken’s mortgage financing is lowHandelsbanken’s loan losses result in low risk weightsThe indebtedness of Swedish households and links to the housing market have long been in focus. The Swedish Financial Supervisory Authority introduced an LTV ceiling in 2010. In the past year, other measures such as amortisa-tion requirements were discussed, and in late 2012, the Supervisory Authority proposed an increased capital requirement in Pillar 2 for Swedish mortgages. The risk weights are low because losses on Swedish mortgage loans have traditionally been very low. When historical default and loss levels are used to estimate capital requirements in the method prescribed by the IRB regulations, and the losses are very low, the risk weights will automatically be low. This section discusses the background to the assessment that the risk in Swedish mortgage financing is so low.

Since the late 1990s, Handelsbanken has had loss levels for Swedish household mortgage loans that are less than zero – that is, recoveries have been greater than provisions for new loan losses. Except for a minor price decline in 2008–2009, property prices have risen continually during this period, and thus the low loan losses are not too surprising. In a society with a strong payments culture and effective opportunities for a bank to claim mortgaged properties and sell them if a borrower defaults on the payments, it is natural that mortgage loans do not cause substantial losses as long as prices are rising.

However, losses on mortgage loans were also low in the very serious bank crisis of the early 1990s. In the worst years of the crisis, the loan loss level for Stadshypotek (which was not owned by Handelsbanken at that point) was around 0.30 per cent per year for private mortgage loans. This was a crisis that really should have affected the mortgages of Swedish households. Property prices fell by some 30 per cent from their peak to their lowest point during the crisis. Between 1990 and 1994, the unem-ployment rate rose from 2 to 11 per cent, while GDP shrank for three years in a row. And in the middle of the crisis, the Riksbank hiked the repo rate dramatically, leading to rising mortgage rates. Despite this deep economic crisis, which hit households hard, loan losses remained at levels which must be regarded as very low by international standards. It was also possible to absorb the losses within the interest margins for mortgages.

Why are loan losses so low?There are a number of factors that may explain why losses on Swedish mortgage loans were not substantial, even in such a serious crisis. The most important are:

which is largely due to the strong incentives for private individuals to always prioritise their debt-related payments. Borrowers who are unable to pay cannot hand over their mort-gaged property to the bank, and in so doing be rid of the loan. If there is a default on pay-ments, the bank has effective options to claim both the mortgage property and other assets. And even if the borrower goes into bank-ruptcy, the debt is not written off: the bank is entitled to claim part of any future income that the borrower may have. All in all, this means that there is a very strong motivation for Swedish households to do their utmost in all circumstances to repay their debts, and to ensure that their indebtedness does not exceed what they are capable of repaying.

information is available to banks when credit assessments are made. The credit informa-tion company UC AB provides plenty of access to information on private individuals that is necessary for good credit assess-ments, such as tax-assessed income, past payment problems and overall credit activity. This good access to information also means that, unlike in many other countries, there are few problems with false information in credit applications.

compensation in the event of circumstances that may cause payment problems, such as unemployment or sickness. Borrowers can often meet their repayments even if they find themselves in circumstances such as these, which is not the case in many other countries.

if they are driven by speculative behaviour, where people buy properties for investment purposes with the aim of earning money from rental income and future price rises (i.e. buy-to-let). This phenomenon hardly exists in Sweden, because in practice, the regulation of the rental market makes such investments impossible, and the taxation system has not favoured private letting.

The risk in mortgage financing is still lowThese conditions limited the losses during the 1990s crisis, but the current situation is less affected by them. In its proposal for increased risk weights, the Swedish Financial Supervisory Authority presented some reasons why the risk in Swedish mortgage loans may have risen. One of the main reasons would be that indebtedness in the Swedish household sector has increased – at least if debts are viewed in relation to disposable income. This ratio has risen from around 130 per cent before the 1990s crisis to

170 per cent today. This is mainly due to the dramatic change in interest rates. But it is also because around 170,000 rental apartments have been converted into housing co-operative apartments since the mid 1990s. This has reallocated some of the total debt from housing companies to households. In Handelsbanken’s view, it is debatable whether this really does result in a higher credit risk on mortgage loans. At present, household interest expenses correspond to just over 4 per cent of dispos-able income, whereas before the 1990s crisis they were more than 10 per cent. For interest expenses to reach those levels, extremely sharp interest rate hikes would be required, and the extent of the burden these debts are for house-hold finances should be the most important factor in assessing the risk level. In addition, the current monetary policy situation, where interest rates are hiked mainly when economic activity is high, means that it must be highly unlikely that rising interest rates will coincide with a situation of high unemployment and major problems in the household sector.

Another factor emphasised by the Super-visory Authority is that loan-to-value ratios for new mortgages are higher today than they were in the years immediately after 2000. A more relevant comparison should be loan-to-value ra-tios before the 1990s crisis, and what the overall LTV for the market as a whole currently is. Ac-cording to statistics from the Riksbanken, total household debt as a proportion of total Swedish property wealth has decreased from around 70 per cent before the 1990s crisis to roughly 55 per cent today. Thus, households are mortgag-ing a considerably smaller part of their property wealth than before the 1990s crisis.

An important factor for property market risk is the trend for the supply of homes. In many housing crises we have seen sharply rising property prices, followed by high levels of new home starts. When the crisis has materialised, the abundant supply of new homes has pushed prices downwards. This was the case in the Swedish 1990s crisis, and also an important factor in the current housing crises in Spain, Ireland and the US. Since the 1990s crisis, Sweden has had a very low level of new home starts, which has been below the requirement of new homes justified by the population growth, particularly in the major cities. This should be regarded as an important limiting factor for risk on the Swedish property market.

All in all, Handelsbanken believes that the risk level in the Swedish property market has not increased compared with the situation before the 1990s crisis. The Bank’s assessment is that the credit risk in its own mortgage loan portfolio continues to be low.

CREDIT RISK


CREDIT PORTFOLIOBreakdown of the portfolioThe Bank’s credit portfolio is presented in this section based on the balance sheet item cat-egories. The section on Capital requirement for credit risks on page 26 presents the credit port-folio based on the capital adequacy regulations.

Unlike balance sheet information – where credit risk exposure is categorised in balance sheet items in the form of loans to the public/ loans to credit institutions and off-balance sheet items divided into product type – credit exposure for the purposes of capital requirement is catego-rised into the exposure classes stipulated in

the regulations for the respective calculation method. Exposure means the sum of items on and off the balance sheet.

Credit risk exposureSEK m 2012 2011

Loans to the public1 1 680 479 1 591 128

of which reverse repos 33 799 13 669

Loans to other credit institutions 89 511 106 823

of which reverse repos 59 241 60 585

Unutilised part of granted overdraft facilities 132 534 152 392

Committed loan offers 239 774 254 415

Other commitments 20 779 9 035

Guarantees, credits 10 723 17 161

Guarantees, other 39 913 42 657

Letters of credit 30 164 36 712

Derivatives2 110 850 142 074

Treasury bills and other eligible bills 48 906 43 971

Bonds and other fixed-income securities 68 354 60 231

Total 2 471 987 2 456 599

The amounts do not include holdings with central banks.1 SEK 4,078 m (4,945) of this amount is loans which upon initial recognition were classified at fair value in the income statement.2 Refers to the total of positive market values. Including legally viable agreements, the exposure is SEK 30,422 m ( 37,588).

Geographical distribution 2012 Loans Off-balance-sheet commitments

SEK m PublicCredit

institutions Derivatives Investments Guarantees Other Total

Sweden 1 169 937 33 297 110 726 99 942 23 486 273 379 1 710 767

Norway 204 473 32 2 - 7 728 40 176 252 411

Finland 88 247 304 116 - 4 543 23 306 116 516

Denmark 65 200 51 121 27 2 137 19 628 87 164

UK 112 871 339 -942 0 3 763 24 207 140 238

Germany 7 136 243 20 - 3 051 7 600 18 050

Poland 2 573 86 1 - 719 190 3 569

Netherlands 13 261 3 - - 656 5 601 19 521

Other countries 16 781 55 156 806 17 291 4 553 29 164 123 751

Total 1 680 479 89 511 110 850 117 260 50 636 423 251 2 471 987

Geographical distribution 2011 Loans Off-balance-sheet commitments

SEK m PublicCredit

institutions Derivatives Investments Guarantees Other Total

Sweden 1 129 954 43 662 141 545 93 557 32 245 307 997 1 748 960

Norway 184 565 199 36 - 6 892 35 517 227 209

Finland 79 720 411 301 - 7 281 23 788 111 501

Denmark 59 769 159 114 63 2 270 22 999 85 374

UK 92 621 165 -606 0 2 560 20 507 115 247

Germany 7 764 426 21 - 3 878 7 650 19 739

Poland 1 942 180 4 - 567 167 2 860

Netherlands 11 921 64 0 - 100 3 346 15 431

Other countries 22 872 61 557 659 10 582 4 025 30 583 130 278

Total 1 591 128 106 823 142 074 104 202 59 818 452 554 2 456 599

CREDIT RISK


Loans to the public, by sector2012 2011

SEK m

Loans beforededuction of

provisions

Provisionsfor probableloan losses

Loans afterdeduction of

provisions


provisions



provisions

Private individuals 743 454 -852 742 602 713 137 -820 712 317

of which mortgage loans 607 163 -44 607 119 581 659 -30 581 629

of which other loans with property mortgages 67 031 -115 66 916 64 122 -100 64 022

of which other loans, private individuals 69 260 -693 68 567 67 356 -690 66 666

Housing co-operative associations 129 131 -17 129 114 123 847 -4 123 843


Property management 436 694 -365 436 329 396 961 -410 396 551

Manufacturing 45 170 -473 44 697 49 221 -497 48 724

Retail 33 646 -441 33 205 35 693 -305 35 388

Hotel and restaurant 8 234 -36 8 198 7 201 -120 7 081

Passenger and goods transport by sea 17 839 -406 17 433 18 356 -202 18 154

Other transport and communication 32 406 -182 32 224 37 374 -178 37 196

Construction 13 395 -106 13 289 12 371 -170 12 201

Electricity, gas and water 23 965 -25 23 940 22 091 -15 22 076

Agriculture, hunting and forestry 8 917 -15 8 902 7 331 -20 7 311

Other services 25 558 -213 25 345 24 398 -60 24 338

Holding, investment, insurance companies, mutual funds etc. 89 219 -601 88 618 85 998 -702 85 296

Sovereigns and municipalities 36 711 - 36 711 21 654 - 21 654

Other corporate lending 40 268 -108 40 160 39 656 -292 39 364

Total loans to the public, before collective provisions 1 684 607 -3 840 1 680 767 1 595 289 -3 795 1 591 494

Collective provisions -288 -366

Total loans to the public 1 684 607 1 680 479 1 591 128

Loans to the public, on balance, by sector broken down by countrySEK m Sweden Denmark Finland Norway UK

Other countries Total

Private individuals 570 956 30 515 29 473 82 078 24 316 5 264 742 602

of which mortgage loans 523 319 13 305 21 460 49 035 0 0 607 119

of which other loans with property mortgages 16 905 12 562 4 170 14 659 14 554 4 066 66 916

of which other loans, private individuals 30 732 4 648 3 843 18 384 9 762 1 198 68 567

Housing co-operative associations 112 218 420 6 321 10 155 0 0 129 114

Property management 241 499 10 527 19 471 80 475 69 679 14 678 436 329

Manufacturing 26 202 1 857 3 137 3 621 2 724 7 156 44 697

Retail 18 519 2 252 2 577 2 573 5 416 1 868 33 205

Hotel and restaurant 2 766 982 628 169 2 637 1 016 8 198

Passenger and goods transport by sea 4 098 4 232 4 320 4 614 39 130 17 433

Other transport and communication 24 262 1 246 3 511 938 720 1 547 32 224

Construction 6 351 415 969 4 453 1 101 0 13 289

Electricity, gas and water 11 343 221 8 234 3 233 12 897 23 940

Agriculture, hunting and forestry 8 184 192 36 53 437 0 8 902

Other services 11 316 2 133 2 605 3 314 3 364 2 613 25 345

Holding, investment, insurance companies, mutual funds etc. 70 880 6 567 1 313 6 933 1 252 1 673 88 618

Sovereigns and municipalities 31 845 3 4 624 237 0 2 36 711

Other corporate lending 29 679 3 650 1 050 1 669 1 194 2 918 40 160

Total loans to the public, before collective provisions 1 170 118 65 212 88 269 204 515 112 891 39 762 1 680 767

Collective provisions -181 -13 -22 -43 -20 -11 -288

Total loans to the public 1 169 937 65 200 88 247 204 473 112 871 39 751 1 680 479

CREDIT RISK


SecuritisationHandelsbanken has limited exposures which are securitisations according to the capital adequacy regulations. These are holdings in bonds and other debt instruments issued by special purpose vehicles. These exposures are mainly in the Bank’s liquidity portfolio. Existing holdings mature at regular intervals and no new investments are made. The purpose of the hold-

ings is to utilise them as collateral with various central banks and thus create liquidity facilities. But the Bank has no securitisations of its own.

Handelsbanken has applied the IRB ap-proach to securitisations in other operations since the fourth quarter of 2008.

All securitised exposures were acquired prior to 2008. Handelsbanken’s total exposure in secu ritisation positions after credit risk protection

amounts to SEK 1,819 million (2,382). Of this sum, SEK 496 million (438) has been deducted from the capital base. All positions are in the role of investor. The risk weight for positions in secu-ritisations is determined on the basis of external credit rating using the external rating approach.

Securitisation positions in other operations after credit risk protection by risk weight 2012

Risk weight

SEK m Exposure amount 7–10% 12–850% 1 250%

Traditional securitisation 1 323 807 516

Synthetic securitisation - - - -

Total IRB 1 323 807 516

Securitisation positions in other operations after credit risk protection by risk weight 2011

Risk weight


Traditional securitisation 1 944 1 305 - 639

Synthetic securitisation - - - -

Total IRB 1 944 1 305 639

Securitisation positions in trading portfolio by risk weight 2012

Risk weight


Securitisation 174 174 - -

Total 174 174

Securitisation positions in trading portfolio by risk weight 2011

Risk weight


Securitisation 232 232 - -

Total 232 232

CREDIT RISK


Credit risk concentrationsHandelsbanken’s branches focus strongly on establishing long-term relationships with cust-omers of sound creditworthiness. If a branch identifies a good customer, it should be able to do business with this customer, irrespective of whether the Bank as a whole has major expo-sure to the business sector that the customer represents. In granting credit the Bank thus has no built-in restrictions to having relatively exten-sive exposures in individual sectors. The Bank monitors and calculates concentration risks continually for various business sectors, geo-graphic areas and individual major exposures. Concentration risks are identified in the Bank’s calculation of economic capital for credit risks and in the stress tests conducted in the internal capital adequacy assessment. This ensures that Handelsbanken has sufficient capital, taking into account concentration risks. If the concentra-tion risks are judged to be excessive, the Bank has the opportunity and capacity to reduce them using various risk mitigation measures.

In addition to mortgage loans and lending to housing co-operative associations, Handels-

banken has considerable lending operations for property management (SEK 437 billion). Prop-erty management here refers to all companies assessed for credit purposes as “property com-panies”. It is common for groups of companies operating in other industries to have subsidiar-ies managing the properties in which the group conducts its business, and such property companies are here also considered to belong to the property management. However, the underlying credit risk in such cases is not only property-related.

A large proportion of property lending is to government-owned property companies, municipal housing companies and other housing-related operations where the borrow-ers consistently have strong, stable cash flows and thus very high creditworthiness. A large part of lending to the property sector is therefore to companies with a very low probability of default and low LTVs. The Bank’s exposure to the prop-erty sector is specified in the tables below.

The proportion of exposures to property counterparties with a poorer rating than the Bank’s normal risk in risk class 5 is very low.

Some 96 (96) per cent of total property lending in Sweden is in risk class 5 or better. The cor-responding figures for property lending in the UK, Denmark, Norway and Finland are 94 (95) per cent, 91 (88) per cent, 95 (95) per cent and 99 (99) per cent (99) respectively. For counter-parties in poorer risk classes than normal, the majority are in risk classes 6 or 7 with only small volumes in the higher risk classes 8 and 9.

In the past few years, Handelsbanken has seen major credit growth in the UK as a result of a planned expansion of the branch network. A relatively large part of the growth has been in property-related credits. This has occurred during a period of poor performance in the UK property market. A strict credit policy often makes it easier to assess creditworthiness in a poorer economic climate since it is easier to identify potential problems. In its expansion, Handelsbanken has had the same strict require-ments on repayment capacity and collateral quality as in its other home markets. The result of this is a high concentration of customers in good risk classes and a loan loss ratio in line with other home markets.

Specification Loans to the public – Property management

SEK m

2012 2011


provisions



provisions


provisions



provisions

Loans in Sweden

State-owned property companies 9 213 9 213 11 808 - 11 808

Municipal-owned property companies 14 468 14 468 15 566 - 15 566

Residential property companies 72 894 -13 72 881 65 556 -12 65 544


Other property management 145 066 -129 144 937 130 250 -127 130 123


Total loans in Sweden 241 641 -142 241 499 223 180 -139 223 041

Loans outside Sweden

Denmark 10 623 -96 10 527 9 408 -48 9 360

Finland 19 481 -10 19 471 18 718 - 18 718

Norway 80 549 -74 80 475 74 615 -73 74 542

UK 69 699 -20 69 679 56 953 -127 56 826

Other countries 14 701 -23 14 678 14 087 -23 14 064

Total loans outside Sweden 195 053 -223 194 830 173 781 -271 173 510

Total loans – Property management 436 694 -365 436 329 396 961 -410 396 551

Specification Loans to the public – Property management Collateral

SEK m

2012 2011

Total

Companies owned by government

and municipality/property lending

guaranteed by government and

municipality

Multi-family dwellings/ residential

property

Commercial properties and other collateral Total

Companies owned by government

and municipality/property lending

guaranteed by government and

municipality

Multi-family dwellings/ residential

property

Commercial properties and other collateral

Sweden 241 641 25 252 80 983 135 406 223 180 29 585 74 978 118 617

Norway 80 549 24 17 146 63 379 74 615 26 13 177 61 412

Finland 19 481 6 624 2 492 10 365 18 718 6 256 2 432 10 030

Denmark 10 623 1 5 368 5 254 9 408 - 3 905 5 503

UK 69 699 9 29 339 40 351 56 953 - 23 239 33 714

Other countries 14 701 694 1 801 12 206 14 087 - 580 13 507

Total 436 694 32 604 137 129 266 961 396 961 35 867 118 311 242 783

CREDIT RISK


Specification – Loans to the public – Property management, risk class and country 2012SEK m

Risk class Sweden Norway Finland Denmark UKOther

countries Total %Accum.%

of total

1 20 059 1 218 3 125 3 1 027 882 26 314 6.03 6

2 71 341 17 202 8 156 545 11 856 6 165 115 265 26.39 32

3 88 330 34 650 6 119 3 650 31 319 6 105 170 173 38.97 71

4 37 792 18 761 1 351 4 015 14 745 855 77 519 17.75 89

5 16 651 4 870 523 1 412 6 491 331 30 278 6.93 96

6 4 663 2 018 84 263 1 883 260 9 171 2.10 98

7 1 864 1 185 90 169 1 265 17 4 590 1.05 99

8 328 109 9 233 121 16 816 0.19 99

9 171 67 7 1 37 - 283 0.07 99

Defaults 442 469 17 332 954 71 2 285 0.52 100

Total 241 641 80 549 19 481 10 623 69 698 14 702 436 694 100

Specification – Loans to the public – Property management, risk class and country 2011 SEK m

Risk class Sweden Norway Finland Denmark UKOther

countries Total %Accum.%

of total

1 18 912 1 109 2 292 17 523 567 23 420 5.90 6

2 58 279 16 744 6 620 272 7 512 6 777 96 204 24.23 30

3 80 422 32 228 7 175 2 811 25 377 5 698 153 711 38.72 69

4 37 591 15 615 1 803 3 498 13 670 308 72 485 18.26 87

5 18 426 5 482 674 1 722 7 173 334 33 811 8.52 96

6 5 481 1 595 27 248 998 300 8 649 2.18 98

7 2 925 1 034 53 191 807 5 5 015 1.26 99

8 396 343 10 119 104 12 984 0.25 99

9 230 21 - 52 97 - 400 0.10 99

Defaults 518 444 64 478 692 86 2 282 0.57 100

Total 223 180 74 615 18 718 9 408 56 953 14 087 396 961 100

Specification – Loans to the public – Property management, risk class and type of collateral 2012 SEK m

Exposure Collateral

Risk class

Multi-family dwellings/

residential propertyCommercial

property

Guarantee from government or

municipalityOther

collateral Unsecured

1 26 314 13 815 5 590 3 406 555 2 948

2 115 265 35 677 50 046 6 772 968 21 802

3 170 173 56 803 84 866 3 934 5 198 19 372

4 77 519 22 030 43 577 619 4 963 6 330

5 30 278 10 483 13 538 348 3 195 2 714

6 9 171 2 829 4 343 25 681 1 293

7 4 590 1 586 2 108 16 157 723

8 816 339 396 2 9 70

9 283 54 162 0 43 24

Defaults 2 285 846 745 8 68 618

Total 436 694 144 462 205 371 15 130 15 837 55 894

Specification – Loans to the public – Property management, risk class and type of collateral 2011 SEK m

Exposure Collateral

Risk class

Multi-family dwellings/

residential propertyCommercial

property

Guarantee from government or

municipalityOther

collateral Unsecured

1 23 420 11 566 5 343 3 180 497 2 834

2 96 204 25 449 39 066 7 664 826 23 199

3 153 711 48 558 70 837 4 957 6 043 23 316

4 72 485 20 790 37 830 924 5 271 7 670

5 33 811 11 639 16 979 438 1 577 3 178

6 8 649 2 787 2 866 26 466 2 504

7 5 015 1 936 2 193 50 180 656

8 984 450 426 0 3 105

9 400 175 134 4 3 84

Defaults 2 282 859 913 3 98 409

Total 396 961 124 209 176 587 17 246 14 964 63 955

CREDIT RISK


IMPAIRMENTS AND PAST DUE LOANS Loans are defined as impaired if contracted cash flows are not likely to be fulfilled. The full amount of all loans which have been classified as impaired are carried as impaired loans even if parts of the loan are covered by collateral. This means that the reserve ratio (provision for probable loan losses as a proportion of impaired loans) does not provide an indication of the remaining risk of loss. Loans which have been written off as actual loan losses are not included in impaired loans.

A past due loan is identified as a loan for which interest, repayments or overdrafts have been overdue for payment for more than five days. In addition to the definition of default established in the capital adequacy regulations, the time for identification of a past due claim is determined internally.

All units with customer and credit respon-sibility in the Handelsbanken Group regularly perform individual assessments of the need to recognise impairment losses for loans and recei-vables at amortised cost. Impairment testing is performed where there is objective evidence that the recoverable amount of the loan is less than its carrying amount. Objective evidence could, according to the circumstances, be late or non-payment, changed credit rating, or a decline in the market value of the collateral.

When performing impairment testing, the recoverable amount of the loan is calculated by discounting the estimated future cash flows rela-ted to the loan and any collateral (including gua-rantees) by the effective interest rate of the loan. If the collateral is a listed asset, the valuation of the collateral is based on the quoted price; oth-erwise the valuation is based on the yield value or the market value estimated in some other manner. Collateral in the form of property mort-gages is valued in the same way as repossessed real property. An impairment loss is recognised if the estimated recoverable amount is less than the carrying amount and is recognised as a loan

loss in the income statement. A reported loan loss reduces the carrying amount of the loan in the balance sheet, either directly (actual loss) or by a provision account for loan losses (proba-ble loss). Information concerning repossessed property to protect claims can be found in note G10, Loan losses, in the Annual Report.

In addition to the above-mentioned assess-ment of individual loans, a collective assessment is made of individually valued loans and of homogenous groups of loans with a similar risk profile, with the purpose of identifying the need to recognise an impairment loss that cannot yet be allocated to individual loans. If necessary, a group impairment is recognised for the group of loans. This impairment loss is based on events that have occurred and that signal lower cre-ditworthiness but that have not been observed individually and where no default has actually occurred. The provisioned amount is based on the change in expected loss in the case of rating migration to risk classes that are poorer than normal risk. Impairment losses which have been recognised for a group of loans are transferred to impairment losses for individual loans as soon as there is information that a provision at an individual level is needed.

Loan losses for the period comprise actual losses and probable losses on credits granted, minus recoveries and reversals of previous impairment losses recognised for probable loan losses. Actual loan losses may refer to entire loans or parts of loans and are recognised when there is no realistic possibility of recovery. This is the case, for example, when a trustee in bankruptcy has estimated bankruptcy dividends, a scheme of arrangement has been accepted or the receivable has been waived in some other way. An amount forgiven in connection with re-construction of a loan or group of loans is always classified as an actual loss. If the customer is following a payment plan for a loan which was al-ready previously classified as an actual loan loss, the amount of the loss is subject to new testing.

Recoveries comprise reversed amounts on loan losses previously reported as actual losses. Information about probable and actual losses is provided in note G10, Loan losses, in the Annual Report.

Impairment losses on available-for-sale financial assets are recognised when there is objective evidence that one or more events of default have occurred with an impact on the expected future cash flows for the asset. For interest-bearing financial assets, examples of events of default that may indicate an impair-ment loss are a probable bankruptcy, evidence of considerable financial difficulties on the part of the issuer or evidence of permanent changes in the market for the asset. For equity instruments, a permanent or considerable decline in the fair value is an indication of the need to recognise an impairment loss. When recognising an impairment loss, the part of the cumulative loss that was previously recognised in the fair value reserve in equity (corresponding to the difference between the acquisition cost and the current fair value less any previous impairment loss) is recognised in the income statement.

Previously recognised impairment losses on interest-bearing securities classified as available-for-sale financial assets are reversed in the income statement if the fair value of the asset has increased since the impairment loss was re-cognised and the increase can be objectively re-lated to an event occurring after the impairment loss was recognised. Previous impairment losses on equity instruments classified as available-for-sale financial instruments are not reversed.

The below maturity analysis of past due loans that are not impaired loans is divided into the volumes in question based on the balance sheet. For non-performing loans that are not impaired loans, the assessment is that contracted pay-ments will probably be fulfilled.

Analysis of past due loans that are not impaired loans 2012

Loans to credit institutions

Loans to the public

SEK m Retail Corporate Other Total

Past due ≥ 5 days ≤1 month - 3 827 1 636 - 5 463

Past due >1 month ≤2 months - 481 154 - 635

Past due >2 months ≤3 months - 391 119 - 510

Past due >3 months ≤12 months - 1 035 213 - 1 248

Past due >12 months - 591 214 - 805

Total - 6 325 2 336 - 8 661

Analysis of past due loans that are not impaired loans 2011

Loans to credit institutions

Loans to the public

SEK m Retail Corporate Other Total

Past due ≥ 5 days ≤1 month - 3 254 1 219 - 4 473

Past due >1 month ≤2 months - 577 167 - 744

Past due >2 months ≤3 months - 435 149 - 584

Past due >3 months ≤12 months - 807 291 - 1 098

Past due >12 months - 324 156 - 480

Total - 5 397 1 982 - 7 379

CREDIT RISK


Past due exposures, provisions for probable losses and impact on profit/loss forIRB-approved exposures, by exposure classes 2012 Impact on profit/loss 2012

SEK mPast due > 5

days EAD

EAD on agreement for

provision

Provision probable

lossesGross

provision¹Net incl.

reversals

Corporate exposures 5 175 2 890 1 786 -884 -733

Retail exposures 7 117 1 625 1 319 -427 -400

private individuals 6 258 1 055 779 -262 -251

of which property loans 3 690 211 156 -54 -52

of which other 2 568 844 623 -208 -199

small companies 859 570 540 -165 -149

of which property loans 54 207 196 -60 -50

of which other 805 363 344 -105 -99

Institutional exposures 53 0 0 0 0

Securitisation positions 0 1 011 516 0 86

Total 12 345 5 526 3 621 -1 312 -1 048

Past due exposures, exposures with impairment losses and impact on profit/loss for non-IRB-approved exposures using the standardised approach 2012 Impact on profit/loss 2012

SEK mExposures with

provision

Provision probable

lossesGross


reversals

Past due items 431 219 -79 -68

¹ Gross provisions refer to probable losses which have reduced the year’s profits, excluding reversals.

Past due exposures, provisions for probable losses and impact on profit/loss forIRB-approved exposures, by exposure classes 2011 Impact on profit/loss 2011

SEK mPast due > 5

days EAD

EAD on agreement for

provision

Provision probable

lossesGross


reversals

Corporate exposures 3 769 2 860 1 687 -859 -597

Retail exposures 6 429 1 575 1 197 -386 -337

private individuals 5 556 1 027 605 -230 -215

of which property loans 3 272 221 130 -41 -38

of which other 2 284 806 475 -189 -177

small companies 873 548 592 -156 -122

of which property loans 51 198 214 -61 -53

of which other 822 350 378 -95 -69

Institutional exposures 7 0 0 0 0

Securitisation positions 0 1 077 639 0 0

Total 10 205 5 512 3 523 -1 245 -934

Past due exposures, exposures with impairment losses and impact on profit/loss for non-IRB-approved exposures using the standardised approach 2011 Impact on profit/loss 2011

SEK mExposures with

provision

Provision probable

lossesGross


reversals

Past due items 499 272 -96 -72

¹ Gross provisions refer to probable losses which have reduced the year’s profits, excluding reversals.

CREDIT RISK


Impaired and/or non-performing loans, geographic distribution 2012 Impaired loansNon-performing

loans which are not impairedGross Provisions Net¹

Of which non-performingSEK m

Sweden 2 762 -1 636 1 109 989 1 327

Norway 645 -292 353 207 417

Finland 1 042 -318 724 415 278

Denmark 1 239 -811 428 237 34

UK 440 -158 282 177 441

Rest of Europe 174 -92 82 43 66

North America 1 021 -516 505 - -

Asia 2 0 2 - -

Total 7 325 -3 840 3 485 2 068 2 563

Impaired and/or non-performing loans, geographic distribution 2011 Impaired loansNon-performing

loans which are not impaired loansGross Provisions Net¹


Sweden 2 576 -1 591 985 913 1 252

Norway 564 -358 206 188 565

Finland 817 -374 443 279 224

Denmark 895 -541 354 195 43

UK 815 -260 555 316 33

Rest of Europe 103 -31 72 27 44

North America 1 083 -639 444 - -

Asia 5 -1 4 1 0

Total 6 858 -3 795 3 063 1 919 2 161

¹ Carrying amount after deduction of specific provisions for individually valued loans and provisions for collectively valued loans, but excluding collective provisions for loans which are individually assessed.

Impaired and/or non-performing loans, by sector 2012 Impaired loansNon-performing

loans which are not impaired loansGross Provisions Net¹


Private individuals 1 541 -852 689 584 1 611

Housing co-operative associations 32 -17 15 12 46

Property management 1 004 -365 639 365 465

Manufacturing 829 -473 356 174 118

Retail 1 085 -441 644 399 45

Hotel and restaurant 79 -36 43 42 19

Passenger and goods transport by sea 419 -406 13 13 0

Other transport and communication 288 -182 106 105 17

Construction 216 -106 110 107 66

Electricity, gas and water 88 -25 63 1 13

Agriculture, hunting and forestry 26 -15 11 9 36

Other services 415 -213 202 190 59

Holding, investment, insurance companies, mutual funds etc. 1 153 -601 552 25 13

Other corporate lending 150 -108 42 42 55

Credit institutions - - - - -

Total 7 325 -3 840 3 485 2 068 2 563

Impaired and/or non-performing loans, by sector 2011 Impaired loansNon-performing

loans which are not impairedGross Provisions Net¹


Private individuals 1 418 -820 598 495 1 464

Housing co-operative associations 7 -4 3 - 76

Property management 1 275 -410 865 515 296

Manufacturing 933 -497 436 307 51

Retail 497 -305 192 182 59

Hotel and restaurant 173 -120 53 53 29

Passenger and goods transport by sea 202 -202 0 0 0

Other transport and communication 244 -178 66 57 20

Construction 289 -170 119 114 51

Electricity, gas and water 37 -15 22 2 -

Agriculture, hunting and forestry 26 -20 6 5 23

Other services 115 -60 55 45 56

Holding, investment, insurance companies, mutual funds etc. 1 231 -702 529 44 33

Other corporate lending 411 -292 119 100 3

Credit institutions - - - - -

Total 6 858 -3 795 3 063 1 919 2 161

CREDIT RISK


Loan lossesSEK m 2012 2011

Specific provision for individually assessed loans

The year’s provision -1 460 -1 341

Reversal of previous provisions 344 335

Total -1 116 -1 006

Collective provisions

The year’s net provision for individually assessed loans 77 29

The year’s net provision for homogeneous loans 5 33

Total 82 62

Off-balance-sheet items

Losses on off-balance-sheet items - 14

Reversal of losses on off-balance-sheet items 0 -

Changes in collective provision for off-balance-sheet items 5 2

Total 5 16

Write-offs

Actual loan losses for the year -1 383 -2 669

Utilised share of previous provisions 975 2 271

Recoveries 186 510

Total -222 112

Net loan losses -1 251 -816

Impaired loans etc. SEK m 2012 2011

Impaired loans 7 325 6 858

Specific provisions for individually assessed loans -3 725 -3 680

Provisions for collectively assessed homogeneous groups of loans with limited value and similar credit risk -115 -115

Provisions by group for individually assessed loans -288 -366

Net impaired loans 3 197 2 697

Total impaired loans reserve ratio, % 56.4 60.7

Proportion of impaired loans, % 0.18 0.16

Impaired loans reserve ratio excluding collective provisions, % 52.4 55.3

Non-performing but not impaired loans 2 563 2 161

Impaired loans reclassified as normal loans during the year 41 344

Loans are classified as impaired loans if contracted cash flows are not likely to be fullfilled. The full amount of all claims which give rise to a specific provision is included in impaired loans even if parts are covered by collateral. This means that the reserve ratio does not take into account collateral received. Non-performing loans are loans where interest, repayments or overdrafts have been due for payment for more than 60 days.

Change in provision for probable loan losses 2012

SEK m

Provision for individually

assessed loans

Collective provi-sion for individually

assessed loans

Provision for collectively

assessed homogeneous

loans

Total provision for probable loan losses

Provision at beginning of year -3 680 -366 -115 -4 161

The year’s provision -1 460 - -82 -1 473

Reversal of previous provisions 344 77 15 367

Utilised for actual loan losses 975 72 1 047

Foreign exchange effect etc. 96 1 -5 92

Provision at end of year -3 725 -288 -115 -4 128

Change in provision for probable loan losses 2011

SEK m

Provision for individually

assessed loans

Collective provi-sion for individually

assessed loans

Provision for collectively

assessed homogeneous

loans

Total provision for probable loan losses

Provision at beginning of year -5 039 -396 -157 -5 592

The year’s provision -1 341 - -78 -1 421

Reversal of previous provisions 335 29 33 397

Utilised for actual loan losses 2 271 78 2 350

Foreign exchange effect etc. 94 1 9 105

Provision at end of year -3 680 -366 -115 -4 161

CREDIT RISK


CAPITAL REQUIREMENT FOR CREDIT RISKSThis section presents the credit portfolio based on the capital adequacy regulations. The pres-entations show both the IRB approach and the standardised approach. The IRB portfolios are divided into the foundation approach and the advanced approach. For balance sheet infor-mation, see the previous section concerning the credit portfolio. When the capital requirement is calculated, this is normally done for credit expo-sures calculated according to EAD (exposure at default). This is the sum of the exposure on the balance sheet and the exposure off the balance sheet multiplied by a conversion factor.

Credits approved for internal risk classification and exposures according to various definitions and details of capital requirements for various exposure classes, 2012

SEK m

Exposure before credit

risk protectionExposure

amount (EAD)

Of which off-balance

sheet

Average exposure

amountRisk-weighted

amountAverage

risk weight %

Exposure-weighted

LGD %Capital

requirement

Corporate exposures 1 184 843 944 987 156 352 923 782 287 825 30 30 23 026

of which repos and securities loans 23 286 23 286 5 449 - 147 0.6 - 12

of which other lending, foundation approach 518 978 341 048 134 155 - 151 711 45 - 12 137

of which other lending, advanced approach 642 579 580 653 16 748 - 135 967 23 24 10 877

- small and medium-sized companies 85 748 72 467 7 151 - 44 365 61 - 3 549

- property companies 423 502 380 147 7 951 - 82 655 22 - 6 612

- housing co-operative associations 133 329 128 039 1 646 - 8 947 7 - 716

Retail exposures 784 725 780 772 43 646 769 713 67 521 9 16 5 402

private individuals 754 396 752 176 37 561 740 884 56 619 8 16 4 529

of which property loans 665 970 665 970 11 948 - 36 060 5 - 2 885

of which other 88 426 86 206 25 613 - 20 559 24 - 1 645

small companies 30 329 28 596 6 085 28 830 10 902 38 34 872

of which property loans 7 223 7 222 13 - 1 826 25 - 148

of which other 23 106 21 374 6 072 - 9 076 42 - 726

Institutional exposures 139 143 128 748 51 678 129 038 12 199 9 15 976


of which other lending 62 555 52 160 39 006 - 11 724 23 - 938

Equity exposures 5 206 5 206 4 910 7 295 140 - 584

Exposures without a counterparty 2 279 2 279 2 280 2 279 100 - 182

Securitisation positions 3 936 1 323 1 469 46 3 - 4

Traditional securitisation 3 936 1 323 1 469 46 3 - 4

Synthetic securitisation - - - - - - - -

Total IRB 2 120 132 1 863 315 251 676 1 831 192 377 165 20 30 174

Credits in the parts of the credit portfolio for which capital requirements are calculated using the standarised approach, details of capital requirements for various exposure classes where exposures exist, 2012

SEK m

Exposure before credit risk protection

Exposure amount

Of which off-balance sheet

Average exposure

amountRisk-weighted

amountAverage

risk weight %Capital

requirement

Sovereign and central banks 292 312 301 760 32 015 404 727 111 0.04 9

Municipalities 23 870 53 038 14 120 53 724 17 0.03 1

Multilateral development banks 673 673 0 1 358 0 0 0

Institutions 5 036 4 606 6 160 5 949 1 288 28 103

Corporate 40 047 22 325 13 663 23 753 22 325 100 1 786

Retail 12 797 9 340 4 242 9 488 7 005 75 560

Property mortgages 28 018 25 961 2 790 22 614 9 871 38 790

Past due items 431 173 6 154 238 138 19

Other items 10 283 10 283 0 13 429 6 632 64 531

Total standardised 413 467 428 159 72 996 535 196 47 487 11 3 799

Total IRB + standardised 2 533 599 2 291 474 324 672 2 366 388 424 652 19 33 973

Exposure, exposure amounts and capital requirementThe table below shows exposures and the total exposure amounts within the IRB-approved credit portfolio, their risk-weighted amounts and the capital requirement the exposures will generate. Exposures are the total exposures on and off the balance sheet. Exposure at default (EAD) is the exposure on which the capital requirement is calculated under the capital adequacy regulations. For off-balance-sheet commitments, EAD is smaller than the nominal exposure, because the full value of these com-mitments is not subject to capital requirement. The following are also shown: the average

exposure amount during the year, the average risk weight for the exposures (the risk-weighted amount divided by the exposure amount) and the average LGD value applied.

When the Bank calculates the capital require-ment according to the advanced approach, different risk estimates are used for the LGD and CF than those stated in the regulations for the foundation approach. Risk estimates according to the advanced approach are based on the Bank’s historical outcome data corrected for business cycle factors and applying the security margins approved by the Swedish Financial Supervisory Authority. Unlike the foundation approach, in the advanced approach the capital

CREDIT RISK


Credits approved for internal risk classification and exposures according to various definitions and details of capital requirements for various exposure classes, 2011

SEK m

Exposure before credit

risk protectionExposure

amount (EAD)

Of which off-balance-

sheet

Average exposure

amountRisk-weighted

amountAverage

risk weight %

Exposure-weighted

LGD %Capital

requirement

Corporate exposures 1 158 380 917 480 173 377 898 962 306 612 33 32 24 529


of which other lending, foundation approach 552 981 374 461 154 038 - 163 151 44 - 13 052

of which other lending, advanced approach 599 059 536 679 17 173 - 143 366 27 25 11 469

- Small and medium-sized companies 87 819 75 068 8 077 - 49 366 66 - 3 949

- Property companies 383 228 339 390 7 362 - 85 150 25 - 6 812

- Housing co-operative associations 128 012 122 221 1 734 - 8 850 7 - 708

Retail exposures 764 716 760 469 43 835 751 073 64 301 8 16 5 144

private individuals 732 736 730 669 37 785 721 195 52 717 7 15 4 217

of which property loans 643 450 643 449 11 537 - 34 936 5 - 2 795

of which other 89 286 87 220 26 248 - 17 781 20 - 1 422

small companies 31 980 29 800 6 050 29 878 11 584 39 32 927

of which property loans 7 285 7 283 17 - 1 903 26 - 152

of which other 24 695 22 517 6 033 - 9 681 43 - 775

Institutional exposures 168 271 158 538 60 824 175 289 19 484 12 19 1 559

of which repos & securities loans 79 640 79 640 14 049 - 402 0.5 - 32

of which other lending 88 631 78 898 46 775 - 19 082 24 - 1 527

Equity exposures 4 355 4 355 4 845 5 933 136 - 475

Exposures without a counterparty 2 364 2 364 2 119 2 364 100 - 189

Securitisation positions 5 051 1 944 2 818 97 5 - 8

Traditional securitisation 5 051 1 944 2 818 97 5 - 8

Synthetic securitisation - - - - - - - -

Total IRB 2 103 137 1 845 150 278 036 1 835 106 398 791 22 31 904

Credits in the parts of the credit portfolio for which capital requirements are calculated using the standarised approach, Details of capital requirements for various exposure classes where exposures exist, 2011

SEK m

Exposure before credit risk protection

Exposure amount

Of which off-balance-sheet

Average exposure

amountRisk-weighted

amountAverage

risk weight %Capital

requirement

Sovereign and central banks 410 897 426 725 36 371 343 093 234 0.05 19

Municipalities 23 059 57 897 10 716 59 693 19 0.03 1

Multilateral development banks 2 372 2 372 0 593 0 0.0 0

Institutions 5 529 6 835 7 146 6 632 1 923 28 154

Corporate 40 664 24 485 9 608 25 835 24 485 100 1 958

Retail 12 877 9 015 3 458 9 821 6 761 75 541

Property mortgages 19 052 17 833 1 564 17 126 6 844 38 548

Past due items 499 190 4 461 270 142 22

Other items 11 263 11 253 21 10 141 6 459 57 517

Total Standardised 526 212 556 605 68 888 473 395 46 995 8 3 760

Total IRB + Standardised 2 629 349 2 401 755 346 924 2 308 501 445 786 19 35 664

requirement is also affected by the maturity of the credit. The risk estimates for LGD and CF led to a slight reduction of the capital requirement at the first reporting occasion as at the fourth quarter of 2010. On the other hand, application of the maturity factor (M) meant that the capital requirement increased compared with the foun-dation approach. Thus, the overall impact on the capital requirement of the introduction of the advanced approach was only marginal.

In the corporate exposure class SEK 74,469 million (77,844) is covered by guarantees for counterparties within the sovereign and municipal exposure class and in the institutional

class. This reduces the exposure amount. The corresponding figure for institutional exposures is SEK 3,265 million (3,377). When there is a guarantor, the capital requirement is calculated as if this party were the counterparty instead of the original counterparty. This is known as substitution. This means that the guarantor’s more advantageous PD can be used instead of the borrower’s PD. On the other hand, the calculation of the capital requirement does not take account of the fact that the credit risk is less since both the borrower and the guarantor must default in order for the Bank to make a loan loss.

For the non IRB-approved parts of the credit portfolio and also where a permanent/time-limited approval has been given by the Swedish Financial Supervisory Authority, the capital re-quirement for credit risks during 2012 is calcu-lated according to the standardised approach. The table below shows the exposure and capital requirement for the standardised portfolio.

CREDIT RISK


Geographical distribution

IRB-approved exposures per country, divided into corporate, retail, institutional and securitisation exposures, 2012

Exposures before credit risk protectionSEK m

Corporate exposures

Retail exposures



Private individuals Small companies Traditional Synthetic

Sweden 710 230 601 738 24 388 66 900 574 -

Norway 165 680 87 150 1 472 152 0 -

Finland 81 245 32 261 1 437 254 0 -

Denmark 41 600 33 247 3 032 13 0 -

UK 126 588 0 0 16 292 0 -

USA 24 050 0 0 51 695 3 362 -

Other countries 35 450 0 0 3 837 0 -

Total 1 184 843 754 396 30 329 139 143 3 936

Exposures calculated using the standardised approach per country, distributed by exposure class, 2012


Sovereign and central

banks Municipalities

Multilateral development

banks Institutions Corporate RetailProperty

mortgagePast due

items Other items

Sweden 42 790 18 618 673 3 141 12 536 1 140 222 21 5 594

Norway 8 759 819 0 2 1 968 578 601 5 2 822

Finland 76 200 3 019 0 392 115 12 39 0 1 057

Denmark 9 897 466 0 171 793 1 497 0 35 686

UK 528 946 0 132 1 476 8 062 20 957 137 76

USA 148 651 0 0 99 666 1 6 0 22

Other countries 5 487 2 0 1 099 22 493 1 507 6 193 233 26

Total standardised 292 312 23 870 673 5 036 40 047 12 797 28 018 431 10 283

IRB-approved exposures per country, divided into corporate, retail, institutional and securitisation exposures, 2011


Corporate exposures

Retail exposures



Private individuals Small companies Traditional Synthetic

Sweden 731 406 588 306 25 480 84 802 1 196 -

Norway 144 376 81 523 1 697 314 0 -

Finland 75 466 32 922 1 692 253 0 -

Denmark 35 152 29 985 3 111 3 0 -

UK 107 853 0 0 17 711 0 -

USA 26 645 0 0 58 914 3 855 -

Other countries 37 482 0 0 6 274 0 -

Total 1 158 380 732 736 31 980 168 271 5 051 -

Exposures calculated using the standardised approach per country, distributed by exposure class, 2011


Sovereign and central

banks Municipalities

Multilateral development

banks Institutions Corporate RetailProperty

mortgagePast due

items Other items

Sweden 45 081 19 145 2 372 3 890 10 982 298 0 1 7 238

Norway 16 346 240 0 7 594 1 143 0 2 2 664

Finland 87 665 2 263 0 161 922 40 0 0 718

Denmark 17 583 484 0 250 692 1 046 0 84 377

UK 1 153 922 0 106 1 871 7 662 15 136 40 42

USA 239 436 0 0 58 1 289 16 12 0 42

Other countries 3 633 5 0 1 057 24 314 2 672 3 904 372 182

Total standardised 410 897 23 059 2 372 5 529 40 664 12 877 19 052 499 11 263

EAD by country broken down into IRB-approved exposures and exposures calculated using the standardised approach

SEK m

2012 2011

IRB Standardised IRB Standardised

Sweden 1 247 998 102 019 1 260 022 120 697

Norway 229 690 13 616 209 967 20 294

Finland 86 080 91 911 80 460 102 138

Denmark 73 857 12 557 65 635 20 222

UK 129 123 29 170 116 382 23 649

USA 67 926 151 513 78 958 242 642

Other countries 28 641 27 373 33 726 26 963

Total 1 863 315 428 159 1 845 150 556 605

CREDIT RISK


Exposures calculated using the standardised approach, distributed by maturity intervals for the various exposure classes where exposures exist, 2011

SEK mExposures before

credit risk protection Within 3 mths 3 mths to 1 yr 1 yr to 5 yrs >5 yrs

Sovereign and central banks 410 897 398 440 6 011 5 756 690

Municipalities 23 059 3 548 2 475 12 897 4 139

Multilateral development banks 2 372 0 1 693 679 0

Institutions 5 529 3 459 1 386 594 90

Corporate 40 664 15 920 9 349 8 348 7 047

Retail 12 877 3 686 1 980 3 122 4 089

Property mortgages 19 052 871 657 3 271 14 253

Total standardised 514 450 425 924 23 551 34 667 30 308

Total IRB + standardised 2 610 868 1 019 140 367 367 758 672 465 689

IRB-approved exposures broken down by maturity for various exposure classes, 2011



Corporate exposures 1 158 380 206 530 217 028 475 161 259 661

Retail exposures 764 716 278 032 114 065 214 405 158 214

Institutional exposures 168 271 108 394 12 265 32 833 14 779

Securitisation positions 5 051 260 458 1 606 2 727

Total IRB 2 096 418 593 216 343 816 724 005 435 381

Breakdown by sector and type of counterparty

IRB-approved exposures by sector and type of counterparty, broken down into corporate exposures and retail exposure/small companies

Exposures before credit risk protection 2012 Exposures before credit risk protection 2011

SEK m Corporate Small companies Corporate Small companies

Housing co-operative associations 134 227 0 129 160 0

Property management 485 447 2 395 436 457 2 467

Manufacturing 108 597 2 409 123 747 2 653

Retail 56 123 5 815 56 321 6 204

Hotel and restaurant 7 215 1 241 6 362 1 225

Passenger and goods transport by sea 25 690 65 26 471 74

Other transport and communication 57 317 2 463 58 553 2 700

Construction 23 629 3 730 22 960 3 936

Electricity, gas and water 42 073 146 44 172 154

Agriculture, hunting and forestry 8 287 1 706 7 859 1 735

Other services 35 924 5 724 32 757 5 780

Holding, investment, insurance companies, mutual funds etc. 162 913 1 890 182 979 1 961

Other corporate lending 37 401 2 745 30 582 3 091

Total IRB 1 184 843 30 329 1 158 380 31 980

Information on maturity intervals

IRB-approved exposures broken down by maturity for various exposure classes, 2012



Corporate exposures 1 184 843 191 584 190 954 587 998 214 307

Retail exposures 784 725 265 416 112 456 232 788 174 065

Institutional exposures 139 143 20 502 3 600 91 778 23 263

Securitisation positions 3 936 1 011 1 521 1 404

Total IRB 2 112 647 477 502 308 021 914 085 413 039

Exposures calculated using the standardised approach, distributed by maturity intervals for the various exposure classes where exposures exist, 2012



Sovereign and central banks 292 312 280 744 4 280 4 832 2 456

Municipalities 23 870 3 793 4 149 10 644 5 284

Multilateral development banks 673 0 0 673 0

Institutions 5 036 3 987 614 435 0

Corporate 40 047 14 665 6 161 14 401 4 820

Retail 12 797 2 194 2 402 4 250 3 951

Property mortgages 28 018 1 432 867 5 967 19 752

Total standardised 402 753 306 815 18 473 41 202 36 263

Total IRB + standardised 2 515 400 784 317 326 494 955 287 449 302

CREDIT RISK


Risk weight and breakdown into risk classesThe table below shows IRB-approved expo-sures broken down into risk classes where the counterparty’s internal rating has been con-verted to risk class 1–9 and defaults. The same information is shown according to a geographi-cal breakdown. Exposures within a risk class may have different PD values. The PD values in the tables are therefore expressed as exposure-weighted average PD. The breakdown is shown for corporate, institutional and retail exposures.

The PD values applied in calculating the capi-tal requirement are based on the Bank’s own loss history and actual defaults. Handelsbank-en’s low, stable loan loss ratio means that the Bank’s PD values are low, particularly in good risk classes where defaults have been extremely rare even in times of economic turbulence. The risk weights are also affected by the LGD values used. These are also calculated on the basis of the Bank’s own loss history for all exposures covered by the advanced approach. In the cal-culations for PD and LGD values, safety margins

have been added. Comprehensive tests have also been performed to ensure that the risk measures are applicable to the Bank’s current portfolios. An important consequence of this is that differences between banks’ average risk weights are due to the credit quality of the exist-ing exposures and the historic loan losses.

Differing portfolio composition is another fac-tor which leads to variations in different banks’ average risk weights for various exposure classes. An important aspect is how banks have chosen to categorise their exposures. Han-delsbanken has classified its lending to housing co-operative associations as corporate expo-sures while certain other banks have decided to classify this as retail lending. Handelsbanken’s choice is conservative since the capital require-ment is higher for corporate exposures than for retail exposures. At the same time, lending to housing co-operative associations has lower risk than corporate lending on average. This means that the average risk weight for the corporate exposures category will be lower than for banks which have classified this as retail

lending, although the risk weights in total will not be affected by the choice. Handelsbanken’s conservative choice therefore leads to a low risk weight for both retail and corporate lending, seen only on the basis of these two categories, compared to other banks’ risk weights. The differences are therefore due to the quality of the banks’ credit portfolio, the institution’s historical loan losses, whether the advanced approach is used and how various loans have been classi-fied in the different exposure classes.

The Bank has very low exposures to coun-terparties in poorer risk classes. For corporate exposures, 95 (95) per cent of the EAD is in risk class 1–5 with low PD values. The correspond-ing figure for institutional exposures is 100 (100) per cent. For retail exposures – private individu-als and small companies – the corresponding figures in the better risk classes are 97 (97) per cent and 83 (81) per cent, respectively. A clear majority of the Bank’s exposures are in risk classes 1–4, which means that the average risk level in the credit portfolio is significantly lower than the level which is assessed as normal risk.

Distribution, risk class

IRB-approved corporate exposures broken down by risk class

2012 2011

Exposure-weighted average PD % EAD SEKm

Proportion EAD %

Accum. % of total EAD


Proportion EAD %


Risk class 1 0.03 90 215 9.55 9.55 0.03 90 842 9.90 9.90

Risk class 2 0.03 252 633 26.73 36.28 0.03 227 454 24.79 34.69

Risk class 3 0.11 338 603 35.83 72.11 0.12 323 244 35.24 69.92

Risk class 4 0.36 152 583 16.15 88.26 0.39 154 274 16.81 86.74

Risk class 5 0.85 67 574 7.15 95.41 0.77 72 949 7.95 94.69

Risk class 6 2.51 21 602 2.29 97.70 2.40 22 612 2.46 97.15

Risk class 7 8.15 10 736 1.14 98.84 5.29 17 039 1.86 99.01

Risk class 8 8.63 4 101 0.43 99.27 9.90 2 351 0.26 99.27

Risk class 9 22.38 595 0.06 99.33 26.82 1 321 0.14 99.41

Defaults 100.00 6 345 0.67 100.00 100.00 5 394 0.59 100.00

Total 944 987 100.00 917 480 100.00

Risk class 1–5 901 608 Risk class 1–5 868 763

Risk class 1–5 95.41% Risk class 1–5 94.69%

IRB-approved institutional exposures broken down by risk class

2012 2011


Proportion EAD %



Proportion EAD %


Risk class 1 0.04 17 574 13.65 13.65 0.04 20 081 12.67 12.67

Risk class 2 0.07 77 261 60.01 73.66 0.07 93 468 58.95 71.62

Risk class 3 0.14 32 625 25.34 99.00 0.14 42 411 26.75 98.37

Risk class 4 0.50 680 0.53 99.53 0.51 2 091 1.32 99.69

Risk class 5 1.47 351 0.27 99.80 1.59 235 0.15 99.84

Risk class 6 2.47 66 0.05 99.85 2.60 131 0.08 99.92

Risk class 7 5.28 176 0.14 99.99 5.39 57 0.04 99.96

Risk class 8 7.42 10 0.01 100.00 7.08 54 0.03 99.99

Risk class 9 15.19 5 0.00 100.00 11.24 10 0.01 100.00

Defaults 100.00 100.00

Total 128 748 100.00 158 538 100.00



CREDIT RISK


IRB-approved retail exposures, private individuals, broken down by risk class

2012 2011


Proportion EAD %



Proportion EAD %


Risk class 1 0.03 142 246 18.91 18.91 0.03 142 680 19.53 19.53

Risk class 2 0.07 267 797 35.61 54.52 0.07 278 028 38.05 57.58

Risk class 3 0.13 189 871 25.24 79.76 0.14 162 005 22.17 79.75

Risk class 4 0.40 113 906 15.14 94.90 0.38 106 023 14.51 94.26

Risk class 5 0.85 18 261 2.43 97.33 0.96 21 207 2.90 97.16

Risk class 6 3.72 6 626 0.88 98.21 3.89 10 293 1.41 98.57

Risk class 7 6.48 5 941 0.79 99.00 6.77 1 820 0.25 98.82

Risk class 8 18.02 3 979 0.53 99.53 11.23 5 309 0.73 99.55

Risk class 9 30.04 554 0.07 99.60 30.37 509 0.07 99.62

Defaults 100.00 2 995 0.40 100.00 100.00 2 795 0.38 100.00

Total 752 176 100.00 730 669 100.00



IRB-approved retail exposures, small companies, broken down by risk class

2012 2011


Proportion EAD %



Proportion EAD %


Risk class 1 0.03 115 0.40 0.40 0.03 99 0.33 0.33

Risk class 2 0.10 4 191 14.66 15.06 0.10 0 0.00 0.33

Risk class 3 0.26 4 867 17.02 32.08 0.22 5 403 18.13 18.46

Risk class 4 0.41 3 266 11.42 43.50 0.59 7 340 24.64 43.09

Risk class 5 1.08 11 195 39.15 82.65 1.19 11 243 37.74 80.82

Risk class 6 2.55 1 456 5.09 87.74 3.36 2 546 8.54 89.37

Risk class 7 5.76 1 697 5.93 93.67 6.60 1 527 5.12 94.49

Risk class 8 15.68 600 2.10 95.77 15.08 543 1.82 96.31

Risk class 9 23.13 291 1.02 96.79 23.35 198 0.66 96.98

Defaults 100.00 918 3.21 100.00 100.00 901 3.02 100.00

Total 28 596 100.00 29 800 100.00



Distribution, risk class and country

IRB-approved corporate exposures, broken down by risk class and country 2012

Exposure- weighted

average PD %EAD

SEKm

Propor-tion

EAD %Accumulated %

of total EAD

Exposure-weighted average LGD %

Sweden %

Norway %

Finland %

Denmark %

UK %

USA %

Other countries

%

Risk class 1 0.03 90 215 9.55 9.55 30.72 9.48 7.82 16.38 22.14 3.24 34.13

Risk class 2 0.03 252 633 26.73 36.28 26.72 29.50 22.86 33.11 12.79 20.25 26.70

Risk class 3 0.11 338 603 35.83 72.11 29.74 35.45 38.43 25.05 19.18 43.86 23.00

Risk class 4 0.36 152 583 16.15 88.26 33.64 13.96 19.81 9.84 27.19 21.26 14.32

Risk class 5 0.85 67 574 7.15 95.41 33.72 7.45 6.00 11.63 7.26 6.61 1.21

Risk class 6 2.51 21 602 2.29 97.70 36.88 2.38 2.44 1.38 2.32 2.34 0.44

Risk class 7 8.15 10 736 1.14 98.84 39.54 0.98 1.68 0.79 1.26 1.53

Risk class 8 8.63 4 101 0.43 99.27 41.35 0.46 0.31 0.79 0.80 0.13 0.20

Risk class 9 22.38 595 0.06 99.33 35.53 0.07 0.05 0.09 0.07 0.03

Defaults 100.00 6 345 0.67 100.00 38.57 0.27 0.60 0.94 6.99 0.75

Total 944 987 100.00

Risk class 1–5 901 608

Risk class 1–5 95.41%

CREDIT RISK


Distribution, risk class and country, cont.

IRB-approved institutional exposures, broken down by risk class and country 2012

Exposure- weighted

average PD %EAD

SEKm

Propor-tion

EAD %Accumulated %

of total EAD


Sweden %

Norway %

Finland %

Denmark %

UK %

USA %

Other countries

%

Risk class 1 0.04 17 574 13.65 13.65 28.94 20.15 7.02 0.08 37.92 25.63 1.11 38.13

Risk class 2 0.07 77 261 60.01 73.66 10.62 48.63 13.25 13.23 52.73 51.25 76.23 55.73

Risk class 3 0.14 32 625 25.34 99.00 17.68 29.47 76.12 81.90 9.32 22.16 22.50 5.46

Risk class 4 0.50 680 0.53 99.53 36.83 0.72 2.06 4.76 0.03 0.89 0.16 0.43

Risk class 5 1.47 351 0.27 99.80 28.07 0.59 1.03 0.03 0.07 0.01

Risk class 6 2.47 66 0.05 99.85 45.00 0.10 0.24

Risk class 7 5.28 176 0.14 99.99 45.00 0.31 0.28

Risk class 8 7.42 10 0.01 100.00 45.00 0.02

Risk class 9 15.19 5 0.00 100.00 45.00 0.01 0.24

Defaults 100.00

Total 128 748 100.00



IRB-approved retail exposures, private individuals, broken down by risk class and country 2012

Exposure- weighted

average PD %EAD

SEKm

Propor-tion

EAD %Accumulated %

of total EAD


Sweden %

Norway %

Finland %

Denmark %

UK %

USA %

Other countries

%

Risk class 1 0.03 142 246 18.91 18.91 12.38 23.70

Risk class 2 0.07 267 797 35.61 54.52 14.86 37.26 32.74 49.89

Risk class 3 0.13 189 871 25.24 79.76 15.72 21.48 42.17 72.20

Risk class 4 0.40 113 906 15.14 94.90 19.39 12.79 21.76 31.37 24.94

Risk class 5 0.85 18 261 2.43 97.33 25.61 2.41 12.12

Risk class 6 3.72 6 626 0.88 98.21 20.72 0.81 1.98 0.01

Risk class 7 6.48 5 941 0.79 99.00 21.87 0.59 0.83 3.55 1.73

Risk class 8 18.02 3 979 0.53 99.53 18.90 0.59 0.41

Risk class 9 30.04 554 0.07 99.60 31.06 0.03 0.23 1.39 0.16

Defaults 100.00 2 995 0.40 100.00 28.17 0.34 0.29 1.26 0.98

Total 752 176 100.00



IRB-approved retail exposures, small companies, broken down by risk class and country 2012

Exposure- weighted

average PD %EAD

SEKm

Propor-tion

EAD %Accumulated %

of total EAD


Sweden %

Norway %

Finland %

Denmark %

UK %

USA %

Other countries

%

Risk class 1 0.03 115 0.40 0.40 27.99 0.50

Risk class 2 0.10 4 191 14.66 15.06 28.71 18.47

Risk class 3 0.26 4 867 17.02 32.08 32.00 15.77 40.00 23.41

Risk class 4 0.41 3 266 11.42 43.50 32.56 13.39 15.91

Risk class 5 1.08 11 195 39.15 82.65 34.87 33.74 90.87 24.22 62.32

Risk class 6 2.55 1 456 5.09 87.74 31.68 5.91 10.29

Risk class 7 5.76 1 697 5.93 93.67 33.01 6.89 3.75 3.39

Risk class 8 15.68 600 2.10 95.77 33.43 2.30 4.23 1.28 9.38

Risk class 9 23.13 291 1.02 96.79 56.00 0.02 0.01 4.89

Defaults 100.00 918 3.21 100.00 53.98 3.01 1.15 4.90

Total 28 596 100.00



CREDIT RISK


Development of risk-weighted assets in 2012 In 2012, the Bank’s risk-weighted assets de-creased by about SEK 20 billion or approximately 4 per cent. This is a slightly smaller change com-pared with the previous year when risk-weighted assets went down by some SEK 24 billion.

The changes in 2012 are almost entirely for credit and counterparty risk. Increased

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Development of risk-weighted assets 2012

exposure volumes, excluding foreign exchange effects, have increased the risk-weighted assets during the year. However, the foreign exchange effects have reduced the exposure volumes more than the underlying increase, which means that the change in exposure volumes, including foreign exchange effects, has resulted in slightly lower risk-weighted assets. The for-eign exchange effect is due to the risk-weighted assets changing in Swedish kronor terms as a result of the krona rate changing against the foreign currencies which the credit portfolio is partly comprised of. The largest decrease in risk-weighted assets during the year is the result of decreased volumes for exposures with a high risk weight, while volumes have risen for ex-posures with a low risk weight. In other words, new business have been with counterparties in better risk classes and better collateral than the average of the Bank’s existing credit portfolio which is known as volume migration. But the effect of counterparties migrating between risk classes – rating migration – has led to increased risk-weighted assets. Net migration, meas-ured as the volume of exposures to custom-ers migrating to better risk classes compared with those that migrate to poorer classes, was negative during the year with most of this effect arising during the last three months of the year. However, the effect of the volume migration

was larger than the effect of the rating migra-tion, which meant that the total risk-weighted assets, from volume and rating migration, have gone down by almost SEK 20 billion. The new risk estimates that were the result of the year’s validations of the outcome for 2011 increased the risk-weighted assets. The item Other effects credit risk includes factors such as increased used of collateral, the effects of defaults and changed LTVs in the existing credit portfolio. In net terms, these factors have contributed to a lowering of risk-weighted volume.

In 2012, no additional portfolios have been approved for reporting according to the ad-vanced approach, but within existing portfolios there have been changes. This is mainly be-cause business volumes have increased in the portfolios reported according to the advanced approach, while business volumes reported ac-cording to the foundation approach have fallen. The effect of this is included in the category Volume migration in the table on the left.

During the year, other risks, market risk and operational risk have increased the risk-weighted assets somewhat. The risk-weighted assets for operational risk have increased since the previous year, due to higher operating income, while risk-weighted assets for market risk have gone down marginally during the year.

Breakdown into risk classes IRB approach

Corporate exposures, foundation approach broken down by risk class

2012 2011

SEK m EAD

Exposure-weighted

average PD %

Exposure-weighted average LGD % RWA

Average risk weighting EAD

Exposure-weighted

average PD %

Exposure-weighted av-erage LGD % RWA

Average risk weighting

Risk class 1 48 661 0.03 42 6 900 14.18 53 588 0.03 43 7 761 14.48

Risk class 2 87 200 0.04 39 13 263 15.21 86 670 0.04 43 14 765 17.04

Risk class 3 129 618 0.17 38 45 668 35.23 132 551 0.15 42 48 858 36.86

Risk class 4 57 402 0.57 44 42 896 74.73 65 099 0.55 44 48 367 74.30

Risk class 5 24 038 1.03 43 22 533 93.74 22 701 0.73 43 18 365 80.90

Risk class 6 8 562 3.35 43 11 247 131.35 9 774 3.08 43 12 542 128.32

Risk class 7 3 310 5.56 44 5 155 155.76 7 921 3.98 45 11 422 144.21

Risk class 8 2 504 6.52 44 4 119 164.49 431 7.23 39 648 150.56

Risk class 9 40 23.16 40 77 192.19 314 26.09 32 518 165.17

Defaults 2 999 100.00 45 0 0.00 1 752 100.00 45 0 0.00

Total 364 334 151 858 380 801 163 246

Corporate exposures, IRB advanced approach broken down by risk class

2012 2011

SEK m EAD

Exposure-weighted

average PD %

Exposure-weighted average LGD % RWA

Average risk weighting EAD

Exposure-weighted

average PD %

Exposure-weighted av-erage LGD % RWA

Average risk weighting

Risk class 1 41 554 0.03 17 2 697 6.49 37 253 0.03 16 2 469 6.63

Risk class 2 165 433 0.03 20 12 733 7.70 140 784 0.03 22 12 181 8.65

Risk class 3 208 985 0.08 25 33 040 15.81 190 694 0.09 26 37 238 19.53

Risk class 4 95 181 0.24 28 30 285 31.82 89 175 0.27 27 30 644 34.36

Risk class 5 43 536 0.76 28 23 176 53.23 50 247 0.79 27 26 582 52.90

Risk class 6 13 040 1.95 33 10 426 79.96 12 838 1.73 33 9 944 77.46

Risk class 7 7 426 9.31 38 10 553 142.11 9 118 6.43 35 10 872 119.23

Risk class 8 1 597 11.94 38 2 594 162.38 1 921 10.50 35 2 728 142.06

Risk class 9 555 22.32 35 939 169.11 1 007 27.05 34 1 796 178.33

Defaults 3 346 100.00 33 9 524 284.58 3 642 100.00 36 8 912 244.69

Total 580 653 135 967 536 679 143 366

CREDIT RISK


Migration/internal rating. Retail exposures – private individuals, 2008–2012

No. of migrations/internal risk class. Corporate exposures, 2008–2012

No. of migrations/internal risk class. Retail exposures – small companies, 2008–2012

parties and small companies. In other words, the number of rating changes to lower risk exceeds the number of changes to higher risk. Thus, the number of risk class migrations in the portfolio shows a trend towards lower risk.

For corporate exposures, the gross migration is relatively stable between the years. Over time, net migration has continually moved towards lower risk.

For small companies, net migration has simi-larly moved towards lower risk in 2012, although not at the same rate as in 2011. The activity level for updating ratings increased. One reason for the trend for small companies during 2011 was the higher activity level for updating the rating of small credit exposures. This was due to the stricter internal requirement for dynamic rating of these exposures. As of 2011, counterparties with a small credit exposure are also included in the requirement for an active confirmation of the current rating at least once a year, even if there is no reason for a dynamic change of the rating. In 2012, the positive migration became weaker while the activity level and degree of change remained at a higher level.

The adjoining graph presents the number of migrations based on the internal rating in terms of private individuals in the class for retail ex-posures. The major migration to increased risk in 2008 is due to the implementation of a new statistical model for annual rating updates. The underlying migration trend is stable over time with small changes in risk.

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Migrations Trends in the quality of the credit portfolio can be identified to some extent by analys-ing changes in the internal risk assessment at counterparty level. This is known as migration (number migration).

The Bank’s corporate counterparties are given an internal rating which is split into two dimensions. The first refers to the risk of finan-cial strain and the second to the counterparty’s financial resistance to such strain. The rating is converted to an internal risk class for application of the IRB model.

For private individuals, in addition to the internal rating, other factors are included when setting the risk class for application of the IRB model. In this analysis of how the risk assess-ment changes for private individuals, only the internal rating is used. This grades the risk level in a dimension on a scale from very low risk to very high risk.

Handelsbanken’s internal rating method is dynamic, which means that the rating is re-assessed when there are signs that the coun-terparty’s repayment capacity has changed to lower or higher risk.

In the adjoining graphs, the proportion of counterparties migrating between risk classes is presented for corporate exposures and for small companies, which due to their size are included in the exposure class for retail exposures. The graphs refer to the years 2008 to 2012 and show that there was a positive net migration during the period for both corporate counter-

CREDIT RISK


COUNTERPARTY RISK Counterparty risks arise when the Bank has entered into derivative contracts with a counter-party for instruments such as futures, swaps or options, or contracts regarding loans of securi-ties. Counterparty risk is regarded as a credit risk where the market value of the contract deter-mines the size of the exposure. If the contract has a positive value, the default of the counterparty means a potential loss for the Bank – in the same way as for a loan.

In calculating both statutory and economic capital (EC), counterparty exposures are taken into account based on the exposure amounts stipulated by the capital adequacy regulations. These credit exposures are then treated in the same way as other credit exposures when calculating statutory capital and when calculat-ing EC for credit risks. In addition to derivatives, the capital adequacy regulations treat both repurchase transactions and equity loans as counterparty risks. When calculating EC, these transaction types are treated in the same way. The Bank applies the mark to market method to calculate the exposure amount for counterparty risks for capital adequacy purposes.

The size of counterparty exposures is restricted by setting credit limits in the regular credit process. The size of the exposures may vary substantially due to fluctuations in the price of the underlying asset. In order to take account of the risk that the exposure may increase, sup-plements are added to the value of the exposure when setting credit limits. These add-ons are calculated using standard amounts that depend on the type of contract and the time to maturity. The exposures are calculated and followed up daily. The counterparty risk in derivatives is reduced through netting agreements, which involve setting off positive values against nega-

tive values in all derivative transactions with the same counterparty. Handelsbanken’s policy is to sign netting agreements with all bank counter-parties. Netting agreements are supplemented with agreements for issuing collateral for the net exposure, which further reduces the credit risk.

The collateral for these transactions is mainly cash, but government securities are also used. Due to the high proportion of cash, the concen-tration risks in the collateral are limited. A limited number of the collateral agreements entered into by the Bank include terms and conditions concerning rating-based threshold amounts for Handelsbanken. These conditions mean that the Bank must provide further collateral for the counterparty in question, in the event of the Bank’s rating from external parties being low-ered. At year-end, a downgrading from AA- to A+ would have meant the Bank having to issue further collateral of SEK 144 million (153).

The Bank holds a portfolio of credit deriva-tives (credit default swaps) which are classed as trading book. The value of purchased protection is SEK 1.1 billion (1.7) and the value of sold protection is SEK 1 billion (1.2).

According to the Basel III regulations, a new capital requirement will be applied to counter-party risk exposures. This capital requirement is based on the risk of a change in value due to the counterparty’s credit quality (credit valua-tion adjustment, CVA) in the counterparty risk exposures. According to current regulations, the banks hold capital for the default risk, but not for the valuation adjustment risk. Implementation of these rules in Sweden is expected to take place through the European implementation of the Basel III regulations, known as CRD IV. With the existing structure of the counterparty risks, an introduction of CVA risk would increase the capital requirement for counterparty risk by

approximately SEK 1.4 billion. Handelsbanken will strive to reduce this effect through, for example, changes to contract structure and collateral as well as greater use of clearing.

PAYMENT RISK Payment risks arise in transactions where the Bank has fulfilled its commitments in the form of foreign exchange conversion, payments or delivery of securities, but cannot at the same time check whether the counterparty has fulfilled its commitments to the Bank. The risk amount equals the amount of the payment transaction. The payment risks are not included in the credit limit of each customer; instead, they are covered by a separate limit. Normally, the limit for the payment risk is approved at the same time as the credit limit. At Handelsbanken, the risk of value changes in spot transactions is categorised as payment risk, while the risk of value changes in de-rivative transactions is categorised as credit risk.

Setting a limit for the payment risk is a vital part of Handelsbanken’s constant aim to limit risks. This includes developing technical solutions which reduce the period of time during which there is a payment risk. In these efforts, Handelsbanken co-operates with various banking sector clearing institutions. The Bank has also established co-operation with the banks which are considered to be the strongest and the most creditworthy.

Handelsbanken also participates in clear-ing collaborations such as CLS (Continuous Linked Settlement) for currency trading. CLS is a global organisation which aims at securing currency exchange settlement by limiting the counter party risk. Handelsbanken is one of approximately 60 owners which are the largest international FX banks. Handelsbanken is also a partner and direct member of EBA (Euro Bank-ing Association) and its euro payment system.

Counterparty risks in derivative contracts including potential future exposure 2012

SEK mCurrent set-off

exposurePotential future

exposure

Total credit exposure for

derivatives/EADRisk-weighted

amountCapital

requirement

Sovereign exposures 888 1 726 2 615 11 1

Institutional exposures 14 305 19 006 33 311 5 756 460

Corporate exposures 15 142 4 601 19 743 6 101 488

Other 87 43 130 43 3

Total 30 422 25 376 55 799 11 911 952

Counterparty risks in derivative contracts including potential future exposure 2011

SEK mCurrent set-off

exposurePotential future

exposure

Total credit exposure for

derivatives/EADRisk-weighted

amountCapital

requirement

Sovereign exposures 5 952 2 098 8 051 4 0

Institutional exposures 15 794 23 555 39 349 6 668 533

Corporate exposures 15 722 5 360 21 082 6 860 549

Other 120 126 245 184 15

Total 37 588 31 139 68 727 13 716 1 097

Counterparty risks in derivative contracts excluding standard add-ons for potential future exposureSEK m 2012 2011

Positive gross market value for derivative contracts 108 872 140 312

Netting gains 78 450 102 723

Current set-off exposure 30 422 37 588

Collateral 11 843 14 384

Net credit exposure for derivatives 18 579 23 204

CREDIT RISK


The international financial crisis of recent years has put the risk in banks’ funding in the spot-light. In particular during 2007 and 2008, the first years of the crisis, it became clear that the short maturity for many banks’ funding rendered them unable to survive without government support when investors lost confidence in their ability to survive. Since then, both banks and authorities have taken many measures to reinforce banks’ ability to withstand a situation in which lenders risk withdrawing their financing. Funding has also increasingly come into focus for the investors who buy banks’ shares and bonds. In the past few years, three questions have become topical and Handelsbanken will discuss its view of them here:1. The importance of deposits as funding. Un-

like many public authorities, rating agencies and other players, Handelsbanken does not consider that deposits are the best source of funding. The stability of the deposits is based on government guarantees rather than an assessment that banks are taking low risk. It is possible that the risk of sudden outflows is under-estimated and that this risk may increase in the future. With an increasingly internet-based banking system where money can be quickly moved, the risk of sudden outflows increases, not only if a bank has fi-nancial problems but also if competitors offer higher interest rates. Handelsbanken consid-ers that a diversified borrowing base with a large component of long-term bond funding is the best way to minimise the Bank’s liquid-ity risk.

2. Utilisation of international funding. The need for international funding is based on Swedish institutional investors increasingly wishing to invest in foreign assets and using Swedish banks for currency hedging of

these investments. By borrowing abroad, Handelsbanken supports these investors and ensures that the Swedish economy has access to international capital, which is nec-essary in order to avoid a shortage of capital when Swedish savings are to a large degree invested in other countries’ economies.

3. Asset encumbrance. When a bank pledges assets in order to safeguard its funding, there is a risk that the risk of loss will increase for non-secured lenders. The most important factor in assessing the risk of loss is the size and quality of the non-encumbered assets rather than the proportion of the Bank’s assets which are encumbered.

After an initial, general description of Handels-banken’s view of its funding and how the liquidity risk is kept at a minimum, these three questions are discussed individually.

STARTING POINTS FOR HANDELSBANKEN’S FUNDINGOne of the central functions of a bank is to man-age its customers’ requirement to have access to liquid funds so that they can make payments. Since banks accept liquid deposits and use these for non-liquid lending, a natural liquidity risk arises. The fundamental starting point for Handelsbanken’s funding is to limit the liquidity risk as far as possible, while meeting custom-ers’ requirements to manage their liquidity and their payments as well as possible. The most obvious way to limit the liquidity risk is to match the maturity of the Bank’s assets and liabilities. If five-year bond borrowing is used to fund five-year lending, the liquidity risk is completely eliminated. Here, bond funding has a clear advantage compared with traditional deposits, since deposit customers can withdraw their money and thus the maturity is not guaranteed.

The base of Handelsbanken’s funding is there-fore customer-driven deposits supplemented with market-based long-term funding with the purpose of matching the non-liquid lending with funding sources which are stable even in a stressed market situation. In practice, individual assets are not funded separately; instead, the Bank looks at the whole balance sheet and how expected cash flows affect assets and liabilities. It must always be possible to match expected cash flows from the Bank with a somewhat larger expected cash flow going into the Bank. This enables a positive cash flow to be main-tained, even in a stressed market situation. For a more detailed description of the liquidity risk management, see the section on liquidity risk on page 44.

When bonds mature, they must be refinanced if the Bank wishes to renew the lending which it has funded. To avoid the refinancing problem if the bond market is closed, the Bank maintains a large liquidity reserve which can be used in such situations. The most important factor in Handelsbanken’s liquidity risk management is to ensure that the Bank’s regular funding is not dependent on the commercial paper and bond markets being open. Handelsbanken’s stress tests show that even in a stressed scenario, the liquidity reserves cover the Bank’s liquidity re-quirement for over two years, even if access to new funding in the markets were to disappear.

Another central principle for Handelsbanken’s funding is that it should be diversified in terms of the instruments, maturities, currencies and mar-kets used. Through having diversified funding, the Bank avoids being dependent on specific sources of funding and ensures that it has as large access to potential funding as possible.

The importance of deposits as funding, international funding and asset encumbrance – Handelsbanken’s view of three topical questions regarding banks’ funding

Handelsbanken considers that a well-diversified funding base with long-term bond funding in Sweden and abroad to supplement deposits, is the best way to limit the Bank’s liquidity risk. Balanced utilisation of covered bonds and low risk in the assets which are not encumbered means that the risk can be reduced for the Bank’s senior lenders.

CREDIT RISK


THE IMPORTANCE OF DEPOSITS AS FUNDINGHandelsbanken’s deposits from customers in its regular operations cover approximately half of the Bank’s lending. Most other banks, especially those outside the Nordic countries, have a significantly larger proportion of deposit funding. The low proportion in Sweden is partly explained by how the Swedish financial market and the Swedish welfare system have devel-oped over a long period of time, where Swedish households save in deposit accounts to a lesser extent than households in other countries.

Deposit savings only make up about 18 per cent of households’ total financial assets in Sweden. In the eurozone, the corresponding figure is twice as large: 36 per cent. The low proportion of deposit savings is primarily due to two factors that are partly linked. Firstly, Swedish households save extensively for their pensions and therefore have a long perspec-tive on their savings; this benefits investments in assets that have an expected high return in the long term, such as equities and long-term bonds. Money is saved to a lesser extent directly in equities and bonds and instead above all through insurance companies and pension funds, and this form of saving has increased considerably since the reformation of the pen-sion system at the end of the 1990s. While there is a major need to save for pensions, Swedish households have a comparatively minor need to keep large sums of money in deposit accounts as a buffer for unforeseen events, because the welfare system protects Swedish households well in case of unemployment or long-term ill-ness, for example.

The other factor that is significant to the fund-ing structure of Swedish banks is the tradition, which has existed for decades, of financing mortgages with bonds through special mort-gage institutions. This means that today there is a large, developed market for covered bonds in Swedish kronor. The major advantage of a bond-funded housing market is that Swedish banks do not need to seek deposits in order to finance mortgage loans. This has coincided well with households’ need to save with a long-term perspective for their pensions, since the insurance companies and pension funds are the dominant investors in Swedish banks’ covered bonds. Thanks to sound government finances, the Swedish government has not increased its issues of government bonds, so issues of covered bonds have increased instead. This has been significant to the opportunities of Swedish institutional investors to invest in interest-bearing securities in Swedish kronor. At the end of the 1990s, the outstanding volume of mortgage bonds was 75 per cent of the outstanding volume of government bonds. Today, the cor-responding figure is more than 150 per cent. The major significance of covered bonds to Swedish institutional investors is naturally also positive for the banks, because the demand for these bonds is very high – which has also been the case during financial crises.

But it is not only structural factors which underpin Handelsbanken’s funding structure. Handelsbanken sees a number of advantages of using long-term bond loans as a complement to deposits. As discussed above, this is due to the Bank’s efforts to achieve funding which mini-mises the Bank’s liquidity risk. The advantage of bond borrowing is that the Bank, in contrast with deposit funding, knows for how long the money will be available and what the cost will be throughout the time to maturity. There is no liquidity risk during the maturity of the bond. Bond funding is also a necessary part of the aim to diversify the funding sources as far as poss-ible. If only deposits are used, diversification is not achieved.

A special advantage of Handelsbanken’s bond funding is that the Bank has its domestic market for covered bonds as a basis for its funding. This market has demonstrated a high degree of stability, which is natural due to its significance for the Swedish financial system. Covered bonds account for almost half of the outstanding volume on the Swedish bond market and all the major institutional invest-ors have large exposures in this market. The market stability also prevailed during the crisis of the 1990s and 2008 and 2009, which were problem years for the Swedish banking market. Handelsbanken was able to issue in the market continually during those years.

Handelsbanken also considers that the view of deposits as a stable source of funding in all situations is misleading and in many respects risky. Deposits can normally be withdrawn immediately, which means that banks that encounter financial problems rapidly risk losing their financing in what is known as a bank run. The fact that deposits are nonetheless still regarded as a stable source of funding is mainly due to the behaviour observed among deposit customers in the majority of bank crises in recent years where they have only withdrawn their deposit savings to a limited extent. In many cases, deposits have proved to be a stable source for banks’ funding even in difficult times, the main reason probably being that they are often covered by deposit guarantee schemes. There are a number of reasons, however, why this behaviour may change and the liquidity risk in deposits may increase:

problems, it is probable that depositors ex-pect the banking system to receive support. It may be difficult to find other banks to trans-fer deposits to if all banks are affected by the problems to a greater or lesser extent. The crises of recent years have largely consisted of system problems of this type. If, instead, only one bank is affected, deposits may well become more volatile.

-creasingly internet-based, it is easier to trans-fer money from one bank to another. When it becomes easier to move money, depositors may conceivably act more rapidly and more drastically in the future, even on the basis of

rather unfounded rumours of bank problems spread via social media, for example.

suddenly move their deposits than seeing a high risk in a bank. For instance, they may receive a more attractive offer from a different bank, or they may wish their savings to be used for a specific ethical purpose. The online possibilities of quickly opening accounts and transferring money between banks create the risk of a general increase in the volatility of deposits.

of corporate deposits are already very price-sensitive and volatile, which means that they are less suitable as a source of funding for the banks’ long-term lending. This mainly applies to deposits from large companies for large sums of money, where the investment is made as an alternative to other financial in-vestments. For smaller companies, deposits are often part of cash management and the sums of money are smaller, so they are often covered by the deposit guarantee scheme. This means that the relationship-based deposits from smaller companies are stable in the same way as household deposits, and it is therefore important to regard deposits from different types of corporate customers in different ways.

Against this background, Handelsbanken’s assessment is that increased funding by means of deposits is not a long-term method of reduc-ing possible liquidity risks. It can be discussed whether it is possible to increase the supply of deposit funding in Sweden to any significant ex-tent. Since Swedish households focus on sav-ing in pensions, the long-term return is in focus, and in the current low interest rate environment short-term interest savings are not particularly attractive. An analysis of how the supply of de-posits varies according to the interest rate situ-ation shows that the relation between interest rates and growth in deposits is weak and that major changes in interest rates are required for the supply to be affected. Interest rate changes of this type are only possible by means of the Riksbank’s interest rate decisions. Changes in banks’ margins on deposit rates cannot achieve this. It is also likely that the potential expansion of the deposit base would mainly be unstable, since it would probably come from investors with more active behaviour who are more likely to withdraw the funds rapidly if creditworth-iness, interest rates or other conditions were to change.

One aspect of deposit funding is that its sta-bility as a source of financing is largely based on the fact that it is guaranteed by the government through the deposit guarantee scheme. When the depositors have the government as their guarantor they do not need to take account of the risk in the investment, because the govern-ment bears the risk if the bank goes under. The deposit guarantee scheme has been broadened in recent years, in terms of the guarantee

CREDIT RISK


maximum amount and the companies covered, so the government bears an increasingly large risk of problems among the guaranteed com-panies. As the depositors do not need to take account of the risk at the bank due to the guar-antee, the monitoring function that a financier normally has over the borrower disappears. This market disciplinary effect exists in the bond mar-ket in a totally different way. Since the govern-ment takes on a higher risk through guarantees for deposits, and the market disciplinary effect disappears, it is remarkable that governments and supervisory authorities also often recom-mend increased deposit funding. There are several historical examples of crises (such as the US Savings & Loans crisis) that were caused by competition for government-guaranteed de-posits forcing an increase in deposit rates. As a result, the banks had to increase the risk in their assets to receive sufficient return. This ultimately led to the banks that had taken the largest risks going under, and the government having to foot the bill due to the deposit guarantee scheme. The government should therefore also be inter-ested in seeing balanced use of deposit funding.

To sum up, the Bank sees a number of advantages of not just prioritising deposits as a source of funding. A diversified funding base creates an opportunity to minimise funding costs and reduces dependency on individual products or markets. Provided that the alterna-tive funding is primarily long term, and cash flows into and out of the Bank are matched, the bond funding means that the liquidity risk in the Bank is significantly lower than with deposit funding alone.

INTERNATIONAL FUNDINGThe discussion about Swedish banks’ fund-ing often presents the funding as something which is independent of how other players in the economy behave. The most important factor underlying the banks’ funding structure is, however, their preferences and the needs of Swedish investors. The previous section discussed how these factors affect access to funding through deposits. There are similar aspects in terms of the requirement for interna-tional funding. Of course, the supply of funding in the economy depends on how much savings are available. In an economy which is not open to foreign countries, the supply of funding is totally dependent on domestic savings. But in a small, open economy such as the Swedish economy, interaction with other countries is very important. For various reasons, Swedish households, companies and institutional invest-ors wish to invest their capital abroad and not only in Sweden. And conversely, there is reason to try and obtain capital from outside Sweden so that a shortage of capital does not limit the conditions for domestic investments. The interaction between savers’ behaviour and the players who supply capital – these mainly being the banks in Sweden – is therefore fundamental

in order to understand the conditions for the need of international funding.

Swedish households’ savings are mainly channelled through various types of intermedi-aries, such as banks, life insurance companies and mutual funds. Banks primarily accept de-posits which are converted to lending, while life insurance companies and mutual funds mainly invest in shares, bonds and other securities. Another important player in the Swedish capital market is the national pension funds (AP funds), which manage public savings for the pension system.

As previously discussed, Swedish savings focus to a large extent on pensions. With pension- oriented savings, it is natural that a considerable part of the savings is invested abroad in order to achieve diversification and maximise the long term return. In total, foreign assets comprise around 44 per cent of Swedish institutional invest ors’ assets. The proportion of foreign assets has increased considerably since the pension system was reformed. In the mid-1990s the corresponding proportion was only 10 per cent. Another important change in the past 15 years is that the government’s borrowing requirement has decreased significantly and, consequently, the supply of government bonds. The Swedish bond market has become more concentrated to the banking sector. Of the total volume of Swedish kronor bonds, banks and mortgage institutions represent 60 per cent, the government 30 per cent and other issuers just over 10 per cent. Taking into account the needs of investors to diversify and to invest a certain percentage in assets with government risk, the increase in investments in foreign bonds is only natural.

When Swedish savings are invested abroad, foreign capital also needs to be brought in to meet the financing needs of the Swedish real economy (households and companies). The diff-erence between the lending that Swedish banks contribute to the Swedish real economy and the Swedish kronor capital that is available as de-posits and issued bonds amounts to about SEK 1,500 billion, which corresponds to about 60 per cent of the total volume of foreign assets held by institutional investors. Swedish banks need to cover this difference with foreign borrowing. About half of Swedish banks’ bond financing is denominated in foreign currency. This proportion has not changed significantly over the past ten years. However, a significant change occurred in the late 1990s, when the percentage increased from about 25 per cent in 1997 to 50 per cent in 2002.

Some institutional investors, primarily life insurance companies and the national pension funds, have regulatory constraints on how large a percentage of assets may be invested abroad. Even without quantitative rules, they may still find reason to restrict currency risk in foreign investments. The national pension funds and life insurance companies manage their currency

risk by entering into derivative contracts with a bank, in which the position in the foreign currency is swapped against Swedish kronor. These swaps usually have a maturity of three months and are provided by a Swedish bank. The swap actually means that the investor lends Swedish kronor to the bank for three months at the same time that the bank lends the equiva-lent amount in foreign currency to the investor for three months. The bank usually finances the swap via short-term borrowing in the foreign currency for an equivalent maturity. For the bank this process usually means that the bor-rowed foreign currency is converted into a loan denominated in Swedish kronor. Consequently, the bank does not undertake any liquidity risk in the foreign currency. The volume of foreign financing that Swedish banks engage in for this purpose is substantial. No detailed statistics are available, but a summary from the annual report of the positions held by the six largest institutional investors at the end of 2011 shows that the aggregate currency hedging of these institutions amounts to almost SEK 600 billion. A substantial portion of Handelsbanken’s short-term foreign borrowing, mainly in US dollars, can be explained by these transactions.

Thus against the backdrop of the actions of Swedish institutional investors, Swedish banks have a natural need to borrow abroad. Does this need entail an increase in liquidity risk for the Bank? The reason generally put forth that this should be the case is that foreign invest-ors have a greater tendency to stop financing if the creditworthiness of the Swedish banks is questioned. Handelsbanken believes that even if such a risk exists, the key question is in what respect the Bank takes liquidity risk in the foreign currency, rather than the amount of foreign financing.

For Handelsbanken it is crucial to differenti-ate between short-term and long-term foreign borrowing. The major problem arises if the Bank finances illiquid assets in the foreign currency with short-term borrowing in foreign currency. If this foreign financing were withdrawn, the Bank would risk a liquidity shortage in the foreign currency. This risk caused the Riksbank to recently increase its foreign reserves, to ensure preparedness for liquidity support to Swedish banks in foreign currency. For Handelsbanken, it is crucial that short-term foreign borrowing is only used to fund liquid assets in the same currency or to fund short-term Swedish assets. If the foreign financing were withdrawn for any reason, the Bank could use the liquid-ity reserve, realise liquid assets or increase financing denominated in Swedish kronor. And as was previously mentioned, the portion of short-term borrowings related to financ-ing currency hedging for Swedish institutional investors does not entail any liquidity risk for the Bank. If currency hedging were impossible on a particular occasion, the institution would have a surplus of Swedish kronor, which would need

CREDIT RISK


to be invested in some form. Since assets and liabilities denominated in Swedish kronor are a closed system, these funds would be invested somewhere in the Swedish financial system. The supply of Swedish kronor would thus increase in this situation.

Handelsbanken cannot see any way that long-term borrowing in foreign currency could be associated with increased liquidity risk for the Bank. As discussed above, according to the Bank, long-term borrowing is the best way to fund illiquid assets as lending. Some refinancing risk exists because long-term bonds also have to be refinanced, but as discussed above, this is limited by the matching between lending and borrowing, by the fact that the Bank holds con-siderable liquidity reserves and by a balanced maturity profile in the Bank’s bond borrowing. The reserves enable the Bank to refrain from all market borrowing for a long period of time. Moreover, it should be preferable for the Bank to avoid overusing the Swedish market when foreign financing is available. By not overusing Swedish market borrowing, the Bank would have more scope to increase issues if a crisis were to arise and foreign markets become more difficult to access.

Thus, the way that Handelsbanken uses foreign financing leads to the conclusion that liquidity risk does not increase. On the contrary, it is an important tool in reducing the liquidity risk and contributes greatly to diversified borrowing with well-controlled liquidity risk.

Given that the potential liquidity risk as-sociated with foreign financing can be well-managed, from Handelsbanken’s perspective it is remarkable that the great socioeconomic benefits of Swedish banks bringing foreign capital to Sweden is not emphasised in the debate about foreign financing. The imbalance between Swedish investors’ demand for invest-ments in Swedish banks and the banks’ need to finance lending to Swedish industries results in a shortage of domestic financing of the order of SEK 1,500 billion to achieve a balance between supply and demand for Swedish financing. Since Swedish banks borrow this money abroad and grant loans to Swedish households and companies, these Swedish banks add a large volume of foreign capital to the Swedish real economy. As a comparison, this amount is about equal to the value of foreign ownership on the Stockholm Stock Exchange, amounting to 60 per cent of the stock of foreign direct invest-ments in Sweden.

Tremendous socioeconomic benefits are associated with investors in an economy having access to capital for their investments, since investment activity is one of the primary driving forces behind economic growth. Most govern-ments, and the Swedish government is no exception, devote considerable resources to at-tracting foreign capital and removing obstacles for its inflow to the domestic economy. With this in mind, it is remarkable that several public

sector representatives in Sweden consider it to be negative that banks bring foreign capital to Sweden. If the authorities were to limit banks’ foreign borrowing, or make it more expensive through fees, it would mean they were trying to limit the addition of foreign capital to Sweden. Meanwhile, there are no limits – and for good reason – on moving Swedish savings abroad. The result would be a distortion in which the opportunities to bring foreign capital to the Swedish economy would be made difficult, compared with the conditions for Swedish capital to support growth in foreign economies.

Sweden is a small, open economy with its own currency, which has benefited in many ways from internationalisation, the growth of free trade and the free flow of capital across borders. These trends have helped to make Sweden one of the world’s best performing economies, which has managed very well in the current turbulent phase of the global economy. It would be a pity to impair the conditions for this by curbing Swedish banks’ financing abroad.

ASSET ENCUMBRANCEDuring the recent financial crisis, central banks all over Europe have provided liquidity to a large number of banks. At no time during the financial crisis has Handelsbanken used these facilities. In late 2011 and early 2012, the ECB provided European banks with 3-year loans through the LTRO facilities, with a total volume of EUR 1,000 billion. Banks that use these different types of central bank financing must provide assets, such as government bonds, as collateral. The percentage of encumbered assets on the bal-ance sheets of these banks has therefore risen sharply over the past year. As a result of this increase, authorities, investors, rating agencies and banks have been discussing the view of and consequences associated with encum-bered assets. The collateral portfolio for unsec-ured lenders, including depositors, is eroding as more and more assets are mortgaged to benefit other lenders. This process is called subordina-tion or asset encumbrance.

The debate has also addressed mortgages in “cover pools” for covered bonds. This type of mortgage is not new, but is essential for the market for covered bonds, which has been per-forming well for a long period of time, with mort-gages as collateral in Sweden as well as in many other countries. In Sweden, AAA-rated covered bonds have become one of the most important asset classes for most pension managers and other institutional investors as the supply of Swedish government bonds has dwindled.

Both investors and regulatory authorities are now demanding greater transparency with respect to the banks’ asset encumbrance, along with clarification of how the banks view the subordination issue. However, the situation is complicated because the central banks have not published bank-specific data regarding uti-lisation of their liquidity facilities. Consequently,

important information is missing about the size of the assets the banks pledged to central banks.

As was previously mentioned, Handelsbanken uses covered bonds to finance portions of its mortgage loan portfolio. However, for some time the Bank has followed a strategy of balanc-ing the use of covered bonds with unsecured senior bonds. By doing so, the Bank would never end up in a position in which its unsec-ured lenders feel they are too subordinated to the secured lenders. The Bank has consistently applied this strategy during the recent financial crisis and has also to a large extent regularly issued senior bonds.

At no time during the entire financial crisis has Handelsbanken ever participated in any type of central bank funding. Consequently, the Bank does not have any assets encumbered in central banks other than the small volume that the Bank is forced to keep available for the Riksbank’s clearing.

Another area in which asset encumbrance is relevant is derivatives transactions. When enter-ing into a derivative agreement, no encumbered assets are linked to the agreement according to the present rules. However, as the value of the underlying assets changes, it is common for banks to receive collateral or be required to pro-vide collateral to their counterparties. Handels-banken has a restrictive view of derivative tran sactions and “mutual collateral agreements” and therefore has very limited volume of encum-bered assets to the Bank’s counterparties.

The general debate has included a variety of views regarding how to assess the asset en-cumbrance situation and which key indicators are appropriate. It is not the volume of encum-bered assets which is of interest but rather the relevant information for evaluating the degree of subordination, which mainly involves:

relation to total unsecured debt.

risk class and liquidity.Based on this information, it can easily be seen which non-encumbered assets are available for unsecured lenders.

MARKET RISK


Market risk

Market risks arise from price and volatility changes in the financial markets. Market risks are divided into interest rate risks, equity price risks, exchange rate risks and commodity price risks.

Handelsbanken has a restrictive view of market risks. Essentially, market risks in the banking operations are only taken as part of meeting customers’ investment and risk management needs. During the past few years, the Bank has worked actively to reduce the market risks in its balance sheet. One result of this is that a much smaller part of the earnings come from net gains/losses on financial items at fair value.

At a universal bank like Handelsbanken, market risks arise when the Bank’s customers demand services where the Bank must have flexible funding. The Bank can also obtain fund-ing on other markets than those where it has its lending so that it can diversify its sources of funding and the funding can also have a different maturity than the assets which are to be funded. Central Treasury also manages a liquidity port-folio that can be converted into liquidity at short

notice in conjunction with possible disruptions in the markets where the Bank conducts its opera-tions. The portfolio also secures the Group’s payments in the daily clearing operations and forms part of the Bank’s liquidity reserve.

Market risks also arise to meet customers’ demand for financial instruments with exposure to the fixed income, currency, equity or com-modities markets. To meet this demand, it may be necessary for the Bank to have certain holdings. This situation arises for example when the Bank has undertaken to set market prices in its function as a market maker. Finally, the Bank has major business flows, making it reasonable for it to take advantage of possible economies of scale.

The Bank’s limit system restricts the size of an exposure to the market. The measuring methods and limits for market risks are estab-lished by the Board. The limits for interest rate, currency and liquidity risk are allocated by the Group Chief Executive and the CFO to the Head of Central Treasury, who in turn allocates these to the business-operating units. The Head of Central Treasury has overall responsibility for managing interest rate, currency and liquidity risks. The Group Chief Executive and the CFO also decide on supplementary risk measures, limits and detailed guidelines. The supplemen-tary limit measures aim to reduce total sensitiv-ity to volatility changes in the financial markets

and the liquidity risk per currency. These measures also limit the risks from a maturity perspective. The CFO, Group Chief Executive and Board continually receive reports on the market risks and utilisation of the limits.

Market risks in the Bank’s business opera-tions mainly arise at Central Treasury, Handels-banken Capital Markets and Handelsbanken Liv, and are managed there. The market risks at the insurance company, Handelsbanken Liv, are described in a separate section. Consequently, the information on market risks given in this sec-tion refers to risks excluding Handelsbanken Liv.

Risk measurementMarket risk is measured in several ways in the Group. Various sensitivity measures are used, showing the changes in value arising from pre-defined changes in prices and volatilities. Position-related risk measures and probability-based Value at Risk models (VaR) are also used. VaR expresses the losses in Swedish kronor that may arise in risk positions due to move-ments in the underlying markets over a speci-fied holding period and for a given confidence level. The VaR method means that different risk classes can be handled in a uniform way so that they can be compared and aggregated into a total market risk.

Handelsbanken’s policy is to have low market risks and low volatility in its earnings. Market risks mainly arise in Handelsbanken Capital Markets as a result of customer-driven transactions through the Bank’s funding.

Decision levels and monitoring of market risk

Handelsbanken Capital Markets

Board

CEO

CFO

Central Treasury

Handels banken Liv Other business units

MARKET RISK


Risk at Handelsbanken measured as VaRFor the portfolios classified as the trading book at Handelsbanken Capital Markets and Central Treasury, VaR is calculated for the individual risk classes and at portfolio level with a 99 per cent confidence level and a one-day holding period.

Since VaR is based on model assumptions, it is important to continually verify the effectiveness of the model. For that reason VaR is regularly evaluated using back testing. These tests verify the number of days when the loss exceeded the estimated VaR. Back testing is performed on

both the actual outcome and on the hypotheti-cal outcome. The latter measures the outcome if the portfolio had been unchanged during the holding period.

A VaR model with a 99 per cent confidence level implies that the outcome will be worse than measured VaR on two to three occasions every year. If the number of observed occasions exceeds the expected number, there is a risk that the model underestimates the actual risk. On two occasions in 2012, the hypothetical outcome was worse than the VaR. This is in line

with what a VaR model with a confidence level of 99 per cent implies.

The VaR model does not identify risks as-sociated with extreme market fluctuations. The calculations are therefore supplemented with regular stress tests where the portfolios are test-ed against scenarios based on all events in the financial markets during the period 1994–2012. The results of these stress tests are reported to the Group Chief Executive, CFO and the Board on a regular basis.

VaR and hypothetical outcome for trading book 2012, Handelsbanken Capital Markets and Central Treasury

-30

-20

-10

0

10

20

30

40

50

60

DecNovOctSepAugJulJunMayAprMarFebJan

Hypothetical outcome Value at Risk

VaR for trading book, Handelsbanken Capital Markets and Central Treasury

Total Equities Fixed income Currency Commodities

SEK m 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011

Average 15 22 2 4 15 23 3 5 1 2

Maximum 26 47 5 11 31 46 8 12 7 5

Minimum 7 8 0 2 8 8 1 1 0 1

Year-end 11 16 2 2 11 12 4 4 1 3

Worst outcome in stress test for trading book, Handelsbanken Capital Markets and Central Treasury

SEK m 2012

Average 38

Maximum 70

Minimum 18

Year-end 28

MARKET RISK


INTEREST RATE RISKInterest rate risk mainly arises at Handelsbanken Capital Markets, Central Treasury and in the lending operations.

In the latter, the interest rate risk arises as a re-sult of the lending partly having longer maturities than the funding. In bond funding, the reverse may also apply, i.e. that the interest-fixing period on the bonds is longer than the interest-fixing period for the lending that the bonds are fund-ing. Interest rate is mainly managed by means of interest rate swaps. In general, interest rate risk exposure is in markets which are characterised by good liquidity.

Interest rate risk is measured at the Bank in several ways. VaR and other risk meas-urements, supplemented by various stress scenarios, are used for Handelsbanken Capital Markets’ portfolios and at Central Treasury. Yield curve twist risks – which are measured and followed up on a regular basis – show the

development of the risks in the case of hypo-thetical changes in various yield curves. The non-linear interest rate risk, for example, part of the risk in interest rate options, is measured and a limit set with pre-defined stress scenarios expressed in matrices. This means that the risk is measured as changes in underlying market interest rates and volatilities.

For other units and for the aggregate interest rate risk in the Group, the interest rate risk is measured as the effect on fair value of a major instantaneous parallel shift of all interest rates. At year-end, the Bank’s total interest rate risk in the case of a one percentage point parallel upward or downward shift in the yield curve, measured as the worst outcome, was SEK -701 million (-707). Most of this risk is a Swedish kronor risk which, together with other home market currencies and an interest rate risk in US dollars, accounts for 99 (98) per cent of the total interest rate risk. This risk measure includes

both interest-bearing items at market value and not at market value, and it is therefore not appropriate to assess the effects on the balance sheet and income statement. The risk measure does not take into account the equity held by the Bank nor the Bank’s opportunities to adapt to changed interest rate levels.

Specific interest rate risk is measured and limits set using sensitivity to changes in credit spreads. It is measured and limited on the basis of different rating classes and is calculated as a market value change for the worst outcome in the case of a parallel shift in the credit spreads of +/- one basis point, i.e. the difference between the interest on the current holding and the yield on a government bond with the same maturity. This is performed for each individual counter-party. The total specific interest rate risk at the year-end was approximately SEK 8 million (7).

Interest rate adjustment periods for the Group’s assets and liabilities 2012SEK m Up to 3 mths 3–6 mths 6–12 mths 1–5 yrs Over 5 yrs Total

Assets

Loans 1 169 895 72 208 98 827 315 171 24 378 1 680 479

Banks and other financial institutions 324 508 1 171 95 279 - 326 053

Bonds etc. 17 561 2 898 955 73 202 8 383 102 999

Total assets 1 511 964 76 277 99 877 388 652 32 761 2 109 531

Liabilities

Deposits 662 987 4 199 3 154 3 208 8 676 682 224

Banks and other financial institutions 172 723 5 399 766 146 5 066 184 100

Issued securities 410 652 106 050 116 130 457 898 81 862 1 172 592

Other liabilities - 98 316 193 3 176 3 783

Total liabilities 1 246 362 115 746 120 366 461 445 98 780 2 042 699

Off-balance-sheet items -207 011 -22 769 23 115 157 104 50 390 829

Difference between assets and liabilities including off-balance-sheet items 58 591 -62 238 2 626 84 311 -15 629 67 661

The table shows the interest rate adjustment periods for the Group’s interest-rate related assets and liabilities as at 31 December 2012, reported by the trade date. Non-interest-bearing assets and liabilities have been excluded.

Interest rate adjustment periods for the Group’s assets and liabilities 2011SEK m Up to 3 mths 3–6 mths 6–12 mths 1–5 yrs Over 5 yrs Total

Assets

Loans 1 139 004 68 984 64 711 288 507 29 990 1 591 196

Banks and other financial institutions 480 062 1 860 552 328 - 482 802

Bonds etc. 25 845 6 586 3 613 27 730 19 030 82 804

Total assets 1 644 911 77 430 68 876 316 565 49 020 2 156 802

Liabilities

Deposits 717 601 3 673 1 957 1 648 8 724 887

Banks and other financial institutions 191 572 3 787 1 799 122 5 126 202 406

Issued securities 548 250 33 428 106 495 434 992 52 227 1 175 392

Other liabilities 198 1 689 176 13 937 1 383 17 383

Total liabilities 1 457 621 42 577 110 427 450 699 58 744 2 120 068

Off-balance-sheet items -149 235 -29 084 28 393 179 827 3 807 33 708

Difference between assets and liabilities including off-balance-sheet items 38 055 5 769 -13 158 45 693 -5 917 70 442

The table shows the interest rate adjustment periods for the Group’s interest-rate related assets and liabilities as at 31 December 2011, reported by the trade date. Non-interest-bearing assets and liabilities have been excluded.

MARKET RISK


EQUITY PRICE RISK The Bank’s equity price risk arises at Handels-banken Capital Markets through customer trad-ing and in the Bank’s own equity portfolio.

Equity price risk in the trading bookThe equity price risk at Handelsbanken Capital Markets arises in customer-generated equity-related transactions. Handelsbanken Capital Markets is a market maker for structured prod-ucts, which gives rise to equity price risk, both linear and non-linear. The non-linear equity price risk arises via options included in the structured products. The extent of own position-taking, which arises to meet customers’ needs, is restricted by the limits set by the Bank’s Board. The Bank limits and measures the equity price risk at Handelsbanken Capital Markets using matrices. The advantage of this method is that it effectively identifies equity price risk includ-ing the non-linear risk. VaR as well as other risk measures and stress scenarios are used as a complement when measuring the equity price risk. The supplementary risk measures include dividend risk, event risk and sensitivity to general volatility changes on the equity market.

Equity price risk outside the trading bookThe majority of the Group’s shareholdings – 96 per cent – comprises shares listed on an active market valued at market price. Unlisted shares are measured at fair value using valuation mod-els. The choice of model is determined by what is deemed appropriate for each individual share. For unlisted shares where the company agree-ment regulates the price at which the shares can be divested, the holdings are valued at a divestment price determined in advance. For ex-ample, there are cases where the shareholders’ meeting decides the value at which the transfer will be made.

The table below shows the risk in the Bank’s total equity positions in the case of hypothetical changes in underlying prices and volatilities at year-end.

EXCHANGE RATE RISKThe Bank has home markets outside Sweden and operations in several other countries. Indirect currency exposure of a structural nature therefore arises, because the Group’s accounts are expressed in Swedish kronor. The structural risk is minimised by matching assets and liabili-ties in the same currency as far as possible. The exchange rate movements that affect the Bank’s equity are stated in note G41 on page 130.

The Bank’s direct foreign exchange exposure arises as a consequence of customer-driven intra-day trading in the international foreign exchange markets. Trading is conducted at Handelsbanken Capital Markets. The Board has set VaR limits for exchange rate risk. At year-end, VaR was SEK 2 million (3). Some foreign exchange exposure also arises in the normal banking operations as part of manag-ing customer payment flows and in funding operations at Central Treasury. The Board has allocated position limits for these exposures. At year-end, the aggregate net position amounted to SEK 293 million (198). The exchange rate risk in the Bank does not thus depend on trends for an individual currency or group of curren-

cies, because the positions are very short and arise in management of customer-driven flows. The total exchange rate risk was SEK -18 million (-44), measured as the impact on the Bank’s earnings of an instantaneous 5 per cent change of the Swedish krona. The sensitivity to a change of the krona against any individual currency did not exceed the total exchange rate risk.

COMMODITY PRICE RISKExposure in commodity-related instruments occurs as a result of customer-based trading in the international commodity markets. The commodity price risk is only a small part of the Bank’s total market risk. Trading in commodi-ties is conducted exclusively at Handelsbanken Capital Markets. Commodity risk, both linear and non-linear, is measured as the absolute total of risk for all commodities to which the Bank is exposed. At the year-end, the commodity price risk was SEK -20 million (-26), measured as the maximum loss on price changes of 20 per cent in underlying commodities and a 35 per cent change in volatility.

Exchange rate sensitivity(worst outcome +/- 5% change SEK against the respective currency)

SEK m 2012 2011

DKK 0 0

EUR -8 -14

GBP -3 -9

NOK -8 -5

USD -9 -9

Other currencies -24 -7

Equity exposures outside the trading bookSEK m 2012 2011

Classified as available for sale 5 205 4 343

of which listed 4 176 3 388

of which unlisted 1 029 955

Classified as available for sale 5 205 4 343

of which business-related 546 565

of which other holdings 4 659 3 778

Fair value reserve at beginning of year 134 1 242

Unrealised market value change value during the year for remaining and new holdings 661 -1 192

Realised due to sale and settlements during the period 1 84

Fair value reserve at end of year 796 134

Included in tier 2 capital 797 133

Equity price riskSEK m

Change in volatility

2012 2011

Change in equity price -25% 0% 25% -25% 0% 25%

10% 514 511 507 442 442 444

-10% -525 -518 -509 -451 -429 -411

FUNDING AND LIQUIDITY RISK


Liquidity risk is the risk that the Bank will not be able to meet its payment obligations when they fall due without being affected by unacceptable costs or losses.

Funding strategyHandelsbanken has a low tolerance of liquidity risks and works actively to minimise them in total and in all currencies. The ambition is that this will provide good access to liquidity, a low level of variation in earnings and a considerable capacity to meet customers’ funding needs, even in difficult times. This is achieved by maintaining a good matching of incoming and outgoing cash flows over time in all currencies of importance to the Bank and by maintaining good liquidity reserves. This ensures that the Bank can keep its core business intact for a very long period of time, even if there is exten-sive disruption in the financial markets.

The starting point of this work is a well-matched balance sheet, where illiquid assets are financed using stable funding. The illiquid assets comprise credits to households and compa-nies; these credits constitute the Bank’s core business. The long-term stable funding of these assets consists of covered bonds issued in Stadshypotek, senior bonds issued by Handels-banken, deposits from households and com-panies, subordinated liabilities and equity. Part of the core operations are short-term lending to households and companies and on the liabilities side some of the deposits for these customers are shorter term. The main point, however, is that illiquid assets are not funded with short-term liabilities. Remaining parts of the balance sheet comprise liquid assets and liabilities that are shorter term. The short-term market funding and deposits from financial institutions finance liquid assets and assets with shorter maturities. In addition, more short-term assets and liabilities arise via transactions that support customer-driven transactions, such as derivative and repo transactions with other banks.

The market has great confidence in Handels-banken and its assessment is that Handels-banken has a very low credit risk. One illustration of this is that the cost of insuring a credit risk on the Bank, which is known as the CDS spread, is one of the lowest of all among European banks, and Handelsbanken has the lowest funding cost among peer banks.

Good diversification between different types of sources of funding in various markets, curr-encies and forms of funding instruments is a key component of the funding strategy. This reduces the significance of individual markets or sources of funding. In recent years, the Bank has considerably broadened its long-term international funding and has issued significant volumes of bonds in, for example, the eurozone, the UK, the US, Asia and Australia. The most important sources of funding are deposits from households and companies as well as covered and senior bonds. The short-term funding mainly comprises deposits from financial companies and institutions as well as issues of certificates. Central Treasury has a number of different funding programmes for market funding at its disposal, which in addition to the programmes reported in the table below contain covered bonds in Swedish kronor. Bonds and certificates are issued under these programmes in the Bank’s and Stadshypotek’s names. The funding programmes ensure well-diversified access to funding in terms of different curren-cies, the number of investors and geographic distribution.

An important part of sound liquidity manage-ment consists of maintaining significant volumes of unutilised collateral that can be used in the event of disruptions in the financial markets. The Bank therefore maintains significant volumes of non-encumbered assets that can be used as collateral when issuing covered bonds and securities with a high credit rating and liquidity. In addition to securing the Bank’s liquidity, this also contributes to limiting the extent to which the Bank’s senior lenders could be subordinated to lenders with collateral for their loans or who invest in covered bonds. The Bank therefore aims to achieve a sound balance between is-suing non-covered bonds and covered bonds. Stadshypotek can issue in most currencies,

and collateral pools are available in Sweden and Norway. The diversification creates cost efficiency in the funding, because the Bank has an opportunity of utilising the sources of funding that involve the lowest costs at that particular time.

Encumbered assets and cover poolsThe adjoining table shows the Bank’s assts split into encumbered assets and non-encumbered assets.

Most of the encumbered assets consist of Stadshypotek’s cover pool, which comprises mortgage loans provided as collateral for outstanding covered bonds. The Bank also has voluntary OC (over-collateralisation – extra assets in addition to those which are needed to cover the issued bonds) of 10 per cent which is included in the pool. These extra assets are in the pool in case the value of the mortgage loans were to fall to a level such that further assets are needed to match the volume of outstand-ing bonds. When assessing the risk that it will be necessary to add further assets, the loan to value (LTV) of the mortgage loans in the cover pool is of fundamental importance. The lower the LTV, the less the risk that more mortgage loans are required in the pool. Handelsbanken’s average LTV in the Swedish pool is very low and was 47 per cent at the year-end. This shows that the pool can manage large falls in the price of underlying property assets before more mort-gage loans must be added to the pool.

As presented in the section on Asset encum-brance on page 39 of the publication Pillar 3 2012, it is not primarily the volume of encum-bered assets which is relevant when assessing the degree of subordination for the Bank’s in-vestors. The relevant factors are volume and the quality of the non-encumbered assets and to what extent these cover the non-secured debt.

Handelsbanken’s very restrictive approach to risk-taking means that the non-encumbered assets are of very high quality. Since Handels-banken wishes to have a balanced utilisation of covered bonds, there is a large volume of mortgage loans which are not encumbered. As shown in the table, other loans also have a very low risk measured in terms of the Bank’s internal rating. The table shows that the volume of

Funding and liquidity riskThe starting point for Handelsbanken’s work on liquidity risk is a well-balanced balance sheet where long-term assets are financed with stable funding. In the past year, Handelsbanken has continued to expand its funding programmes, issued both covered and senior bonds, broadened its investor base and expanded its liquidity reserve. This enables operations to be main-tained in circumstances that are much more difficult than those which have existed in the past few years.



Handelsbanken’s 5-year CDS spread compared with ITRAXX Financial 2007–2012

0

100

200

300

400

0

100

200

300

400

Dec-06Dec-07

Sep-07Mar-0

7Jun-07

Mar-08

Jun-08Sep-08

Dec-08Mar-0

9Jun-09

Sep-09Dec-09

Mar-10

Jun-10Sep-10

Dec-10Mar-1

1Jun-11

Sep-11Dec-11

Mar-12

Jun-12Sep-12

Dec-12

ITRAXX Financials 5-year SHB CDS 5-year Source: Ecowin, Bloomberg

Basis points

ITRAXX Financials is an index of CDS spreads for the 25 largest bond issuers in the European bank and insurance sector. It describes the average premium that an investor requires in order to accept credit risk on the companies.

non-encumbered assets for Handelsbanken is 207 per cent of the outstanding volume of non-secured funding. The conclusion is therefore that Handelsbanken’s use of covered bonds does not result in a level of encumbrance which jeopardises the security of non-secured lenders to the Bank.

Pricing liquidity riskAn important part of liquidity risk management is that deposits and lending are priced internally, taking into account the liquidity risks that they give rise to. For example, when the Bank grants a loan with a long maturity this creates the need to obtain additional long-term funding – which is

more expensive than more short-term funding. This is because investors who purchase the Bank’s long-term bonds, in addition to yield, also demand higher compensation for the maturity. This must be taken into account in the Bank’s pricing, which ensures that the price which internal units in the Bank have to pay for

Funding programmes/limits as of 31 December 2012

Programme Programme size CurrencyUnutillised amount, current programme Countervalue SEK m

ECP1 5 000 EUR 2 080 17 892

ECP (Stadshypotek)1 4 000 EUR 2 421 20 825

French Certificates of Deposit 5 000 EUR 2 107 18 124

EMTCN (Stadshypotek)1 20 000 EUR 7 060 60 728

MTN1 100 000 SEK 69 794 69 794

Swedish Commercial Paper 25 000 SEK 21 930 21 930

Swedish Commercial Paper (Stadshypotek) 90 000 SEK 87 070 87 070

EMTN1 50 000 USD 28 134 182 969

Other funding > 1 yr1 15 000 USD 12 960 84 285

USCP 15 000 USD 6 645 43 216

Extendible Notes 15 000 USD 14 230 92 545

US 144A / 3(a)(2) 15 000 USD 9 650 62 759

Stadshypotek US 144A 15 000 USD 11 900 77 392

Stadshypotek AUD Covered Bond Programme 5 000 AUD 4 250 28 688

Total 868 217

Total programme amount, SEK m 1 354 148

Unutillised amount, SEK m 868 217

Remaining to utilise, % 64%1 It is possible to issue in other currencies than the original programme currency under these programmes,where currency conversion takes place at the time of issue.



Encumbered assets and other pledged collateral 2012SEK bn

Exposure on balance sheet

Loans to the public 560

Assets for insurance policyholders 79

Government instruments and Bonds 56

Cash, equities and securities loans 7

Total 702

Pledged without underlying claim1 51

Non-encumbered/non-pledged assets 2012SEK bn NEA2

Acc. prop. of non-secured funding, %3

Cash and balances with central banks 246 31

Liquid bonds in liquidity portfolio 114 45

Loans to households 349

of which mortgage loans 225 74

of which loans secured by property mortgage 17 76

of which other household lending 107 90

Loans to companies 687

of which mortgage loans 67 98

of which loans to housing co-operative associations excl mortgage loans 23 101

of which loans to property companies excl mortgage loans

- risk class 1–3 196 126

- risk class 4–5 79 136

- risk class >5 12 137

of which other corporate lending

- risk class 1–3 194 162

- risk class 4–5 91 173


Loans to credit institutions 88

- risk class 1–3 86 187


Other lending 33 192

Other assets 118 206

Total 1 635 2071 Over-collateralisation in cover pool (OC).2 NEA: Non-encumbered assets.3 Issued short and long non-secured funding and due to credit institutions.

Cover pool data, Sweden

SEK m 31 Dec 2012 31 Dec 2011

Stadshypotek total lending, public in Sweden 780 770 752 258

Available assets for cover pool 691 596 673 080

Utilised assets in cover pool 596 128 584 238

Maximum LTV, weighted average ASCB definition 47.4 48.5

Volume-weighted LTV (LTV-Mid) 23.7 23.8

LTV, distribution

0–10% 26.6 28.8

10–20% 21.9 21.5

20–30% 17.7 17.4

30–40% 14.1 13.9

40–50% 11 10.7

50–60% 8.3 7.3

60–70% 0.3 0.3

70–75% 0.1 0.1

Loan amount, weighted average, SEK 544 800 519 200

Loan term, weighted average, no. of months 38 37

Interest fixing periods, distribution

Floating rate (3 months) % 34 49

Fixed rate (> 3 months) % 66 51



Holdings with central banks and banks, and securities holdings in the liquidity reserve 31 December 2012, market value

SEK m SEK EUR USD Other Total

Cash and balances with and other lending to central banks 1 398 77 217 148 312 19 167 246 094

Balances with other banks and National Debt Office, overnight1 12 790 313 734 3 451 17 288

Government-issued securities 20 463 3 830 10 939 218 35 450

Securities issued by municipalities and other public entities 507 0 130 - 637

Covered bonds 47 557 2 268 4 525 1 846 56 196

Own covered bonds 15 286 286 - 1 773 17 345

Securities issued by non-financial companies - - 1 233 - 1 233

Securities issued by financial companies (excl. covered bonds) 660 1 591 455 - 2 706

Other securities - - - - 0

Total 98 661 85 505 166 328 26 455 376 9491 From 31 December 2012 repos are reported on the respective securities line.

Holdings with central banks and banks, and securities holdings in the liquidity reserve 31 December 2011, market value

SEK m SEK EUR USD Other Total

Cash and balances with and other lending to central banks 14 471 87 123 239 394 34 763 375 751

Balances with other banks, overnight (incl. repos) 17 635 445 219 3 814 22 113

Government-issued securities 23 316 4 168 2 695 2 30 181

Securities issued by municipalities and other public entities 797 - - - 797

Covered bonds 30 585 1 956 153 - 32 694

Own covered bonds 6 260 - - - 6 260

Securities issued by non-financial companies - 997 125 - 1 122

Securities issued by financial companies (excl. covered bonds) 5 309 1 050 5 165 - 11 524

Other securities - - - - -

Total 98 373 95 739 247 751 38 579 480 442

the loans they obtain from the Bank’s treasury function varies according to the maturity. The internal pricing is important in order to create the right incentive and thereby avoid unsound risk-taking. The Bank has worked with maturity-based internal prices for a long time. Already in 2007, the Bank decided to continue regular issuing of long-term bonds – despite the higher prices for funding as a result of increased credit spreads. At the same time, the internal pricing system was developed to set prices at contract level for the underlying liquidity risk that the agreements give rise to, and at market price for the applicable maturity. The system was fully implemented in 2010.

OrganisationIn an otherwise totally decentralised business model, all funding and liquidity risk manage-ment are centralised to Central Treasury. The basic condition for the funding operation is that it must promote long-term stable growth in profits by limiting market and liquidity risks. This is achieved by matching cash flows between funding and lending. The Bank thus minimises the economic risks in funding and can thereby decide on stable and long-term internal interest rates to the business-operating units. Further-more, all liquidity risk limits are channelled via Central Treasury out into the operations.

In the wake of the financial crisis of recent years, a number of new regulations will come into force in the next few years. The Bank has made various changes to meet these new requirements.

These include a centralised treasury func-

tion with overall responsibility for all funding and liquidity risk management, an increased proportion of long-term funding, internal prices that reflect the liquidity risk and maturity, and expanded market reporting.

Central Treasury is responsible for the Bank’s clearing operation and monitors liquidity flows during the day to ensure that the Bank has sufficient collateral in its payment systems at any given time to meet the Bank’s payment obligations. The Bank ensures intra-day liquidity through good control over the Bank’s accounts and close cooperation with the Bank’s busi-ness-operating units and their liquidity needs.

The Bank ensures liquidity through collateral in Sweden’s central bank (the Riksbank), via the Scandinavian cashpool and in the collabora-tive work and central banks where it is also required to support the Bank’s core business. The Bank participates in the Continuous Linked Settlement (CLS) and various local payment col-laborations. The Bank is also working actively to meet future requirements for monitoring and reporting intra-day liquidity as proposed by the Basel Committee.

Composition of fundingThe Bank used all funding programmes during the year. Handelsbanken was the first Nordic bank to issue covered bonds in Australian dollars and during the year, the Bank issued both covered and non-covered long-term bonds in all currencies that are relevant to the Bank. Short-term funding mainly takes place through issues of certificates of deposit under the various loan programmes in Sweden, Europe and the US.

These loan programmes are supplemented by funding in the international interbank market. Central Treasury ensures that the maturity structure and currency composition in the bal-ance sheet are in keeping with the Bank’s risk tolerance. A total of SEK 239 billion (214) was issued in long-term funding during the year, and at the year-end, the Bank had prefinanced all bonds maturing in 2013.

Liquidity reserveTo ensure sufficient liquidity to support its core operations in stressed financial conditions, the Bank holds large liquidity reserves. Liquidity re-serves are kept in all currencies that are relevant to the Bank and are accessible from Central Treasury. The liquidity reserve is independ-ent of funding and foreign exchange markets and can provide liquidity to the Bank at any time – some parts immediately and other parts gradually over a period of time. The liquidity reserve comprises several different parts. Cash, balances and other lending to central banks are components which can provide the Bank with immediate liquidity. The reserve also comprises government bonds, covered bonds and other high-quality securities which are liquid and eligi-ble as collateral with central banks. These can also provide the Bank with immediate liquidity. The remainder of the liquidity reserve comprises an unutilised issue amount for covered bonds and other liquidity-creating measures. As at the year-end, the Bank’s total liquidity reserve exceeded SEK 750 billion.



Liquidity riskThe Bank handles a large number of incoming and outgoing cash flows every day. The gap between incoming and outgoing cash flows is restricted by means of limits. Liquidity planning is based on an analysis of cash flows for the respective currency. As a general rule, a larger exposure is permitted in currencies with high liquidity than in currencies where the liquidity is low. The strategy is that expected outgoing cash flows from the Bank must always be matched with incoming cash flows into the Bank that are at least of the same amount, and that a positive cash flow and cash position must be maintained – even in stressed conditions. The gap analysis is supplemented by scenario tests, in which the effect on liquidity is stressed and analysed using various assumptions. These stress tests are performed at Group level and individually for the currencies that are important to the Bank. The internal governance of the Bank’s liquidity situ-ation is based on these stressed liquidity figures.

As a measure of short-term disruptions in the funding market, both the Basel Committee and the Swedish Financial Supervisory Authority have proposed a risk ratio called the Liquidity Coverage Ratio (LCR). The LCR is an external reporting requirement and is not part of the Bank’s steering model. The ratio is not defined in exactly the same way in the Basel Commit-tee’s proposal and in the liquidity coverage ratio decided on by the Swedish Financial Supervi-sory Authority. Handelsbanken reports its data according to the Swedish Financial Supervisory Authority’s definition. The figure states the ratio between the Bank’s liquidity buffer and net cash flows in a very stressed scenario during a 30-day period. The ratio must be more than 100 per cent. A short-term liquidity ratio may display a degree of volatility over time, for example when funding that was originally long term and that finances mortgage loans is replaced by new long-term funding, or when the composi-tion of counterparty categories varies in the short-term funding. At the year-end, the Group’s aggregated LCR was 136 per cent, which shows that the Bank has large resistance to short-term disruptions on the funding markets. This also applies in US dollars and euros.

Continuous stress testing of cash flows based on certain assumptions is used to test resistance to more long-term disruptions in the market. For example, it is assumed that the Bank cannot obtain funding in the financial markets at the same time as 10 per cent of deposits from households and companies disappear gradually over the course of a month. It is further assumed that the Bank will continue to conduct its core activities, i.e. that fixed-term deposits from and loans to households and companies will be renewed at maturity and that issued commitments and credit facilities will be partly utilised by customers. The Bank also takes into account that balances with central banks and banks will be utilised and that Central

Refers to the currency distribution as at 31 December 2012 for issued securities and financing from credit institutions with a residual maturity of less than one year.

SEK 16% (20)EUR 18% (23)USD 53% (43)Others 13% (14)

Short-term funding per currency

Refers to the currency distribution as at 31 December 2012 for issued securities and financing from credit institutions with a residual maturity of more than one year.

SEK 58% (64)EUR 25% (22)USD 9% (9)Others 8% (5)

Long-term funding per currency

Refers to distribution per instrument as at 31 December 2012 for issued securities with residual time to maturity of more than one year.

Covered bonds 65%Senior bonds 32%Subordinated debt 3%

Long-term funding per instrument

Maturity profile long-term funding

0

20

40

60

80

100

120

140

160

180

20262022202120202019201820172016201520142013

Prefunded maturities Covered bonds

Senior bonds Subordinated debt

SEK bn

Treasury’s securities can immediately supply liquidity if provided as collateral in central banks. Measures to create liquidity are also used to gradually provide the Bank with liquidity. With these conditions, the Bank will be liquid for over two years. Thus, the Bank also has major pow-ers of resistance to long-term disruptions in the funding market.

The maturity analysis shows undiscounted cash flows for the contracted payment com-mitments that are due for payment at the latest within the stated time intervals, including inter-est flows. The below table shows holdings of bonds and other interest-bearing instruments in the time interval in which they can be converted into liquidity if they are provided as collateral or sold. This means that the table does not reflect the actual maturities for the instruments included. Assets, liabilities and interest flows are also shown that mature in the time intervals cor-responding to the contractual maturity dates. Interest flows for lending in the mortgage opera-tions are matched in time with the liabilities that funded the lending. Financial guarantees, committed loan offers and unutilised over-draft facilities are reported in their entirety in the 0–3-month interval. The total outstanding amount of these commitments does not neces-sarily represent future funding requirements. For derivative instruments, cash flows are reported net for interest rate swaps and gross for instruments where gross cash flows are paid or received, such as currency swaps.

50 000

100 000

150 000

200 000

250 000

300 000

350 000

400 000

SEK m

Jan-13Feb-13

Mar-13Apr-1

3May-1

3Jun-13

Jul-13Aug-13

Sep-13Oct-1

3Nov-1

3Dec-13

Jan-14

Liquidity stress test including liquidity-creating measures – cumulative liquidity position

Refers to issued securities as at 31 December 2012 with an original maturity exceeding one year.



Liquidity coverage ratio (LCR) 31 December 2012, %

EUR 301

USD 174

Total 136

Calculated according to the Swedish Financial Supervi-sory Authority’s directive 2012:6 which came into force on 1 January 2013.

Maturity analysis for financial assets and liabilities, 2012SEK m Up to 3 mths 3–12 mths 1–5 yrs Over 5 yrs

Unspecified maturity Total

Cash and balances with central banks 248 917 - - - - 248 917

Bonds and other interest-bearing securities 119 019 - - - - 119 019

Loans to credit institutions 67 130 692 942 3 954 17 473 90 191

of which reverse repos 59 257 - - - - 59 257

Loans to the public 246 870 221 126 349 089 938 782 15 777 1 771 644


Total 681 936 221 818 350 031 942 736 33 250 2 229 771

Due to credit institutions 132 664 6 235 454 17 225 33 683 190 261

of which repos 2 394 - - - - 2 394

Deposits and borrowing from the public 129 799 23 471 5 562 11 124 515 826 685 782

of which repos 12 295 - - - - 12 295

Issued secutities 322 185 277 089 553 903 90 840 - 1 244 017

Other trading liabilities 14 261 - - - - 14 261

Subordinated liabilities 607 4 242 13 429 6 091 550 24 919

Total 599 516 311 037 573 348 125 280 550 059 2 159 240

Off-balance-sheet itemsFinancial guarantees and unutilised commitments 393 087

Derivatives 2012SEK m Up to 3 mths 3–12 mths 1–5 yrs Over 5 yrs Total

Total derivatives inflow 712 417 327 296 514 236 132 378 1 686 327

Total derivatives outflow 714 534 322 003 503 293 131 641 1 671 471

Net -2 117 5 293 10 943 737 14 856

Liquidity Coverage Ratio (LCR) - decomposition, 31 December 2012, SEK m

Liquid assets 210 299

Liquid assets level 1 161 442

Liquid assets level 2 48 857

Cash outflows 402 356

Deposits 149 860

Market funding 207 681

Other cash outflows 44 815

Cash inflows 247 176

Inflows from maturing lending to non-financial customers 26 122

Other cash inflows 221 054

The components are defined in line with the Swedish Financial Supervisory Authority’s directives and requirements for the liqui-dity coverage ratio and reporting of liquid assets and cash flows, FFFS 2012:6. Liquid assets level 1 corresponds to Chapter 3, Section 6. Liquid assets level 2 corresponds to Chapter 3, Section 7. Customer deposits corresponds to Chapter 4, Sections 4–9. Market funding corresponds to Chapter 4, Sections 10–13. Other cash flows corresponds to Chapter 4, Sections 14–25. Loans to non-financial customers corresponds to Chapter 5 Section 4. Other cash inflows corresponds to Chapter 5, Sections 6–12.

Maturity analysis for financial assets and liabilities, 2011SEK m Up to 3 mths 3–12 mths 1–5 yrs Over 5 yrs

Unspecified maturity Total


Bonds and other interest-bearing securities 106 054 - - - - 106 054

Loans to credit institutions 104 245 1 972 962 633 - 107 812


Loans to the public 230 622 104 035 222 818 1 135 339 - 1 692 814


Total 816 917 106 007 223 780 1 135 972 - 2 282 676

Due to credit institutions 178 503 6 572 2 828 22 100 - 210 003

of which repos 4 056 - - - - 4 056

Deposits and borrowing from the public 188 899 29 291 5 483 5 490 495 725 724 888

of which repos 8 003 - - - - 8 003

Issued secutities 439 973 212 333 527 827 56 565 - 1 236 698

Other trading liabilities 17 748 - - - - 17 748

Subordinated liabilities 9 510 6 836 16 877 6 764 - 39 987

Total 834 633 255 032 553 015 90 919 495 725 2 229 324

Off-balance-sheet itemsFinancial guarantees and unutilised commitments 415 842

Derivatives 2011SEK m Up to 3 mths 3-12 mths 1–5 yrs Over 5 yrs Total

Total derivatives inflow 770 596 511 375 663 685 177 428 2 123 084

Total derivatives outflow 763 194 509 166 650 092 177 830 2 100 282

Net 7 402 2 209 13 593 -402 22 802



Maturities in US dollarsIn the financial turbulence of recent years, Nordic banks’ need for market funding has been in the spotlight – and above all, the need for funding and the ability to obtain funding in US dollars. The starting point of the debate was that the Nordic central banks have limited

opportunities of providing the Nordic bank sys-tem with liquidity in US dollars. In the event of a liquidity crisis, the Nordic banks would encoun-ter problems when trying to cover their needs in US dollars. Handelsbanken is preparing for such a potential scenario by having reserves in all currencies that are relevant to the Bank and

continuity planning that does not presume that the markets for currency transactions are open. The Bank’s funding in US dollars exceeds the Bank’s need for funding in US dollars. In addition, the maturity structure of the assets and liabilities minimise the liquidity risk in the US dollar balance sheet.

Maturities for assets and liabilities USD, 20121

SEK m Up to 3 mths 3-12 mths 1–5 yrs Over 5 yrsUnspecified

maturity Total


Bonds and other interest bearing securities 16 978 - - - - 16 978

Loans to credit institutions 57 660 319 420 2 423 - 60 822

Loans to the public 5 515 1 742 15 944 4 279 8 27 488

Other, including derivatives 131 535 26 994 25 794 11 943 - 196 266

Total assets 360 008 29 055 42 158 18 645 8 449 874

Due to credit institutions 63 566 724 32 0 2 116 66 438

Deposits and borrowing from the public 60 563 159 - - 12 081 72 803

Issued secutities 199 422 58 008 36 385 16 813 - 310 628

Subordinated liabilities - - 186 - - 186

Total liabilities 323 551 58 891 36 603 16 813 14 197 450 055 1 The table excludes interest flows.

RISKS IN THE INSURANCE OPERATIONS


Risks in the insurance operations

The risks in the insurance business mainly comprise market risks and insurance risks.

Market riskHandelsbanken Liv conducts life insurance op-erations with traditional management, unit-linked insurance and portfolio bond insurance. For unit-linked and portfolio bond insurance, the cust-omer chooses the investment option and bears the market risk. In traditional insurance with guaranteed interest, Handelsbanken Liv bears the risk of the financial guarantees entailed by the insurance terms not being fulfilled. The financial guarantee means that the company makes a capital contribution at the value of the insurance contract at specific points in time when the value is less than the guaranteed value of the insur-ance. Any capital contributions are realised at the year-end or when there is an insurance event.

Handelsbanken Liv’s board establishes the annual investment guidelines for the company, and this is the ultimate controlling document for allocation of the company’s investment assets relating to traditionally managed insurance. The purpose of the investment guidelines is to provide instructions on how the assets are to be invested given the undertakings to the policyholders and the statutory requirements of the Swedish Insurance Business Act and the applicable directives of the Swedish Financial Supervisory Authority.

Market risk at Handelsbanken Liv arises in the management of investment assets for the traditional insurance and from the fact that valu-ation of the company’s obligations is sensitive to interest rate changes.

The total market risk at Handelsbanken Liv is calculated using Value at Risk (VaR) with a 99.5 per cent confidence level and a holding period of one quarter. In addition, the company’s solvency ratio, traffic light situation and cover of liabilities are followed up according to statutory require-ments. The market risk management model used by Handelsbanken Liv weights the risk of a capital contribution at insurance contract level together with the risk of a capital contribution at company level due to the increased present value of future guaranteed amounts. Market risk is measured in terms of the overall sensitivity of the capital contributions to market disruptions.

The risk exposure is checked daily against a limit stipulated by the Board of Handelsbanken. The larger of the value of contributions to policyhold-ers or contributions due to solvency constitutes the risk utilisation. Sub-categories of financial risk are interest rate risk, equity risk, credit risk, property risk and currency risk. The main risk at Handelsbanken Liv is interest rate risk. At year-end, VaR was SEK 995 million (857).Liquidity risk in the insurance operations is the risk that the company will not be able to meet its payment obligations when they fall due, or that the company will not be able to sell securities at acceptable prices. This risk is limited by most of the investment assets being invested in listed securities with good liquidity.

Handelsbanken Liv has a low risk tolerance. The goal of the asset management is to secure the company’s obligations to the policyholders while maintaining low management costs.

Insurance riskInsurance companies set their premiums based on assumptions regarding the size of costs for future insurance events. Insurance risk is the risk that the actual and assumed insurance costs differ. The ultimate controlling document is the insurance risk policy issued by the board of Handelsbanken Liv, specifying the amounts within which insurance policies may be issued.Insurance risk at Handelsbanken Liv is related to the following events:

event of the death of the insured person

insured person living, for example, pension disbursements

work incapacity

An insurance policy may contain combinations of these four events.

Most of Handelsbanken Liv’s policies are taken out by small companies and private indi-viduals. There is no risk concentration in terms of insurance risk, other than that most of the policies are taken out in Sweden.

Increased longevity in Sweden has an impact on the life insurance company’s future commit-ments. The effect is positive for mortality insur-ance, but for life insurance it could become an economic burden for the company since average life expectancy is rising and pension disburse-ments must then be made over a longer period.

Since 2009, Handelsbanken Liv has used life expectancy assumptions according to DUS06, which is the industry standard. If mortality con-tinued to decline and in general were to be 10 per cent lower than the company’s assumptions, the present value of the expected increased cost would be SEK 55 million. Most of Handels- banken Liv’s insurance policies with mortality risk are priced annually. This means that the company can unilaterally change the premium from year to year. Thus, an incorrect mortality assumption can be changed with rapid effect.

Changes in morbidity occur much more rap-idly than changes in mortality, which may con-tribute to variations in the risk result. The result therefore depends both on how many insured persons fall ill and how many recover in relation to the assumptions applied. Sickness/disability insurance products are generally designed in such a way that the premium can be changed annually, thus allowing the company to com-pensate for changes in morbidity. The sickness/disability result for 2012 is SEK 65 million, where SEK 59 million is attributable to sickness cases reported during the year, SEK 3 million to existing sickness cases which are being closed and the remaining SEK 3 million to sickness cases which have occurred but not yet been reported.

The insurance operations report their market, insurance and operational risks to the insur-ance company’s board and chief executive, to Handels banken’s Central Risk Control and to the Bank’s CFO, Group Chief Executive and Board.

Solvency IIThe implementation of the Solvency II regula-tions has been further delayed and it is currently unclear when the directive will be fully imple-mented and implemented in Swedish law. How-ever, parts of the regulations will be introduced in the regulatory authorities’ practical supervision as of 1 January 2014. The legislator’s aim is to strengthen protection for policyholders by linking the solvency requirement more clearly to how in-surance companies identify, measure and man-age all risks that occur in the companies such as market, insurance, credit and operational risk. During the last few years, Handelsbanken Liv has worked on adapting the operations to Solvency II, and this will continue during 2013.

The risks in the insurance business arise partly in management of customers’ insurance assets and how these assets match future commitments.

OPERATIONAL RISK


Operational risk

Operational risk refers to the risk of loss due to inadequate or failed internal processes, people and systems, or external events. The definition includes legal risk.

Handelsbanken has a low tolerance of opera-tional risks and works actively to identify and manage operational risks. This work is supp-orted by the Bank’s strict attitude to risk, but also by the strong focus on cost-effectiveness, since deficiencies in administrative order can easily lead to unnecessary costs. Operational errors and deficiencies are therefore reduced as far as possible. This applies to minor but frequent events and major events which could cause major unexpected losses. The Bank’s management performs frequent, active follow-up of operational risk through the organisation for risk control. Operational risks which may lead to the most serious consequence are the subject of special attention. Internal Audit’s examination of the operations also focuses on operational risk.

The responsibility for the management of operational risks is distributed between opera-tions, local risk control and Central Risk Control. The business operations are responsible for the regular identification and management of risks. Local risk control is responsible for ensuring that existing methods and procedures for manag-ing operational risks are used in the business operations, and for evaluation of operational risk management. They are also responsible for implementation and follow-up of proactive measures. Central Risk Control is responsible

for the procedures that are used to identify, steer, control and report operational risks, and for follow-up at overall Group level.

Operational risk exists in all operations within Handelsbanken, and the responsibility for the day-to-day identification, management and control of risk is a clear, integrated part of managerial responsibility at all levels of the operations. The Bank’s decentralised method of work promotes cost-consciousness that results in vigilance against potential loss risk in daily procedures and events. By focusing on good administrative order and possible proactive measures, all parts of the operations keep their risks at an acceptable level.

Operational risks are included in internal in-structions issued by managers with function re-sponsibility, where account is taken of whether the division of work and responsibilities, the control structure of procedures, and information and reporting systems are fit for purpose. Rules and procedures are assessed annually and the internal control of procedures and business flows is documented. The manager of each unit also conducts annual security reviews with their staff, including internal control, information security, bank confidentiality and other security measures.

Apart from the responsibility for operational risk borne by the managers, there are officers with special responsibility for information secu-rity and Group security who report directly to the Group Chief Executive.

Local risk control functions with staff responsible for operational risk are in place at regional banks, main departments, subsidiaries and units outside the Bank’s home markets. They are responsible for ensuring that existing methods to manage operational risk are used and they work proactively to identify operational risks and to monitor that appropriate measures

to reduce the risks are taken and completed. They also check that operational risk manage-ment is correctly conducted.

Central Risk Control has the overall respon-sibility for the methods used for identifying and quantifying operational risk. Central Risk Control is also responsible for analysing and reporting the Group’s operational risk to the management and Board, and for monitoring the measures taken to reduce the operational risks. To achieve and maintain good quality in this management, Central Risk Control and the local risk control functions cooperate closely and on a regular basis. Operational risks are reported to the Board every six months. Ahead of this report, Central Risk Control obtains information from heads of regional banks, main departments, subsidiaries and Handelsbanken International. The information covers significant events, major losses and important proactive measures which are in progress. Central Risk Control supple-ments this with an aggregated risk assessment at Group level. When major external events affect other financial institutions, the report can be supplemented with information concerning internal investigations or proactive measures within the Bank. The whole report is presented to the CFO, Group Chief Executive and Board.

The Bank pays great care when processing new products and services and major changes to existing products and services. Each busi-ness area, subsidiary and regional bank with product responsibility processes new products in accordance with central guidelines, which are minimum requirements. This includes an established process for deciding how products are to be introduced. A risk analysis led by the local risk control is always performed before a product is launched. The analysis takes account of the risks for the Bank and for the customer, including operational risks. Central Risk Control

Operational risks must be managed so that the Group’s operational risks and losses remain small, both in comparison with previous own losses incurred, and – when comparison is possible – with other banks’ operational losses.

OPERATIONAL RISK


is informed of the results of the analysis and is involved in complex cases when this is justified.

As an aid to continual identification, handling and assessment of operational risks, the Bank has a self-assessment procedure, a reporting and case management system for incidents and risk indicators.

In order to capture the operational risks that are not identified and managed in regular proce-dures, internal control or when approving new products, all regional banks, main departments, subsidiaries and international units outside the Bank’s home markets perform an annual self-assessment of operational risks called OPRA Risk Analysis. The local risk control function is responsible for carrying out an OPRA analysis every year. Central Risk Control provides sup-port for the planning and implementation. Units with more complex operations divide the self-assessment procedure into several sessions. Normally, around 5–8 experienced employees who have a good overview of the unit’s opera-tions and risks participate in the sessions. The aim is to identify risks and assess the conse-quence and likelihood of the event occurring. The assessment of the impact includes both financial losses and lost reputation. Important input includes facts and statistics from incidents reported during the previous year together with incidents that have affected other parts of the Group or other banks and companies. The self-assessment procedure results in an action plan stating the risks to be reduced, how this will be done, who is responsible and time limits for when measures are to be taken. The action plan is a working document that is regularly followed up during the year by local risk control. To confirm that the assessment procedure has been completed, Central Risk Control is informed about the completed OPRA analysis,

including the action plan. The action plan is also used in Central Risk Control’s follow-up of proactive measures taken by the local risk control function.

An incident is an event that is covered by one of the seven Basel II types of event that cover operational risk. All employees throughout the Handelsbanken Group have a duty to report incidents that affect their units. A loss in excess of SEK 25,000 is always an incident. Incidents reported are reviewed and categorised on a regular basis by the local risk control func-tion. The work also includes following up and initiating any proactive measures. This is done in close collaboration with the affected depart-ments and branches. Local compliance is also authorised to monitor incidents reported in the regional bank, main department, subsidiary or international unit in question. In addition to Central Risk Control, the central departments of Group Security, Internal Audit, Information Security and Compliance have access to the database and can follow all incidents reported at Group level. This facilitates collaboration concerning management of risks and proactive measures.

There are emergency and continuity plans in place in all parts of the Group for dealing with serious disruptions. The emergency plans help the crisis team to quickly and systemati-cally start to deal with a crisis situation and its effects. There is a central crisis team for the whole Group, and a local crisis team within each regional bank and international unit outside the Bank’s home markets and also at the Central IT Department and Handelsbanken Capital Markets. The central crisis team has permanent staff consisting of members of management and/or those close to them. The central crisis team functions as a liaison crisis team in the

event of a major crisis in the Group, supports any local crisis team(s) working with an acute crisis and functions as a crisis team for the main central departments. Continuity planning focuses on taking preventive measures to mini-mise the consequences of a serious disruption of business operations.

Handelsbanken uses the standardised approach to calculate the capital require-ment for operational risks. According to the standardised approach, the capital requirement is calculated by multiplying a factor specified in the regulations by the average operating income during the last three years of operation. Different factors are applied in different business segments.

The total capital requirement for operational risks for the whole of the Handelsbanken Group was SEK 4,181 million (4,117) at the end of 2012.

RISKS IN THE COMPENSATION SYSTEM


Compensation risk is the risk of loss or other damage arising due to the compensation system.

The aim of the Bank’s policy on salaries is to increase the Bank’s competitiveness and profitability, to enable the Bank to attract, retain and develop skilled staff, and to ensure good skills development and management succes-sion planning. Good long-term profitability and productivity performance at the Bank create the conditions for stable and positive salary devel-opment for the Bank’s employees.

Compensation for work performed is set individually for each employee, and is paid in the form of a fixed salary, customary salary benefits and a pension provision. At Handelsbanken, salaries are set at the local level. Salaries are set in salary reviews between the employee and their line manager. These principles have been applied for many years with great success. They mean that managers at all levels participate regularly in salary processes, and take responsi-bility for the Bank’s salary policy and the growth in their own unit’s staff costs. Salaries are based on salary-setting factors defined in advance, namely the nature and level of difficulty of the work, skills, performance and results achieved, leadership (for managers who are responsible for the career development of employees), supply and demand on the market, and the task of ambassador for the Bank’s corporate culture.

The Bank has low tolerance of compensation risks and actively strives to keep them at a low level. This is achieved in part by only using vari-able compensation to a very limited extent and only in the areas where this is market practice. Where variable compensation exists, it is sub-ject to deferred payment.

The Bank’s principles for compensation to employees are long established. The princi-ples for the Bank’s compensation system are

stipulated in the compensation policy which is decided by the Board. More detailed imple-mentation directives are decided by the Group Chief Executive. The responsibility for identifying and managing compensation risks rests with every responsible manager in the operations and is managed according to internal policies, guidelines and instructions. Local risk control regularly monitors that the compensation sys-tem is applied as intended. Central Risk Control is responsible for evaluating the risks associated with the compensation policy and the compen-sation system before the compensation policy is processed and established by the Board. This is done at least once a year. A broad approach is used in the evaluation, and points that must be evaluated include the incentive structure, the balance between fixed and variable compensa-tion, deferral rules, and effects on the capital base. In addition, Central Risk Control evaluates the application of the compensation. Based on this risk analysis and evaluation, an assessment is made as to whether the compensation sys-tem is designed in a way that could threaten the Bank’s financial position. The responsibility also includes ensuring that risk costs are calculated correctly in the context of compensation.

Handelsbanken’s remuneration policy and compensation system are deemed to generate low risks and promote sound and effective risk management, counteract excessive risk-taking, fit in with the Bank’s low tolerance of risks and support the Bank’s long-term interests. The compensation system is designed in such a way that there is no risk that the Bank’s capital base is undermined as a result of mandatory payment of variable compensation. It is possible to re-duce or remove variable compensation, wholly or partly – which applies both for allocations for variable compensation and for deferred variable compensation which has not yet been paid.

For more detailed information and statistics about the Bank’s compensation system, see the Corporate Governance Report and note G8, Staff costs, in the Annual Report.

Risks in the compensation systemThe compensation system is intended to boost the Bank’s competitiveness and to contribute to higher profitability by attracting, retaining and developing skilled staff. An incorrectly designed compensation system may lead to actions that conflict with the Bank’s long-term goals and stimulate undesirable risk-taking which can negatively affect the company’s financial situation. To ensure that Handelsbanken has a well designed compensation system, risks in the compensation system are managed as a separate risk, with the same allocation of responsibilities as other types of risk.

ECONOMIC CAPITAL


Economic capital

Handelsbanken’s model for calculating economic capital identifies in one measurement the Group’s overall risks and indicates the capital which, with very high probability, will cover unexpected losses or decreases in value.

The Central Risk Control function is responsible for comprehensive monitoring of the Group’s various risks. The Bank’s model for economic capital (EC) is an instrument in this monitoring. It is a vital component in planning to ensure that the Group has sufficient capital at all times in relation to all risks in the Group. The Group per-spective therefore means that economic capital also includes risks in the insurance operations and risks in the Bank’s pension obligations.

Economic capital is calculated with a time horizon of one year and a confidence level that reflects an acceptable level of risk and desired

Total of AFR and EC including diversification, 31 December 2012

0

30

60

90

120

150

ECAFR

SEK bn

Credit risk Market risk

Non-financial risk Risk in pension obligations

Handelsbanken is well capitalised in relation to the total risks. The total values in the Group exceed by a wide margin the values that could be lost in an event that is extremely detrimental to the Bank.

rating. The Board has determined that the cal-culation of the EC must be made with a 99.97 per cent confidence level, which captures an event which is extremely unfavourable for the Bank. EC is the difference between the out-come in an average year – with positive results and good growth in the value of the Bank’s assets – and the outcome in the event of an extreme shock at a 99.97 per cent confidence level.

Diversification effects between the differ-ent risk classes are taken into account when calculating EC. The capital requirement for all risks is therefore lower than the sum of the EC for each individual risk, because the risks are partly independent of each other.

The capital and other financial resources which form a buffer that can absorb negative outcomes are called available financial re-sources (AFR). AFR is Handelsbanken’s equity with the addition of other financial values on and off the balance sheet, available to cover losses with a one-year time horizon.

In risk and capital management, the Group applies a shareholder perspective. The economic capital model provides an overall view of the Group which makes it possible to optimise the risk and capital situation from the shareholder’s perspective. The outcome of the calculations plays an important role when new transactions or structural changes are considered.

Credit risk is calculated using simulated outcomes of default for all the Group’s counter-parties and exposures.

Market risks comprise trading risks, the inter-est rate risk in the banking operations, market risks in the insurance operations and the risk of value losses in the Bank’s own share portfolio.

The risk in the pension obligations mainly con-sists of the risk of a decrease in the values that exist for securing the Bank’s pension obligations. Most of the pension obligations are in Sweden and are secured there in a pension foundation and insured in an occupational pension fund.

The non-financial risks are operational risk, business risk, property risk and insurance risk. Business risk is related to unexpected variations in earnings in the business area in question. This may arise if, for example, demand or competi-tion changes unexpectedly, thus resulting in lower volumes and narrower margins. Property risk captures the risk of a fall in the value of the properties which the Bank owns.

At year-end, EC was SEK 57 billion (56), of which credit risks accounted for the main part of the total risks. The Board stipulates that the AFR/EC ratio should be at least 120 per cent. The AFR/EC ratio was 213 per cent (229) at year-end, which illustrates that the Bank is well-capitalised in relation to its overall risks. The Swedish Financial Supervisory Authority has come to the same conclusion in its overall capital assessment of the Bank.

The risk and capital situation reported is a snapshot picture, even though the risk calcula-tions include safety margins for business cycle fluctuations. To perform a final assessment of the Group’s capital adequacy requirements, account must also be taken of the stress and scenario analysis carried out as part of the Bank’s capital planning.

KAPITALPLANERING


Capital planning

Handelsbanken’s capital planning aims to ensure that the Group has financial resources available at all times and that the capital is of optimal composition. The capital requirement is a function of the Group’s risks, expected development, the regulations and goal figures, Handelsbanken’s model for economic capital and also of stress tests. The Bank’s capital requirement is reported weekly to the CFO, regularly to the Group Chief Executive, and at least quarterly to the Board.

The targets for the Bank’s capital are deter-mined regularly by the Board on the basis of stress tests of regulatory capital and EC. The Board stipulates that the tier 1 capital ratio in Basel II, which is the relevant measurement for management of the Bank according to the present rules, must be between 9 and 11 per cent. In view of the anticipated new rules with increased capital requirements, the Bank has opted to increase its capitalisation above the target interval. An adjusted target for capital can be decided when the new regulations have been established.

As part of proactive capital planning, there is a contingency and action plan with specific measures that can be taken if the Bank needs to improve its capital position. The purpose of the contingency and action planning is to ensure that there is a warning system that identifies potential threats at an early stage and that the Group is prepared to take rapid action, if necessary.

A long-term capital plan is drawn up annually, which is designed to give a comprehensive overview of the Group’s current capital situation, a forecast of expected capital performance, and the outcome in various scenarios. These scenarios are designed to substantially differ from expected events and thus harmonise with the Group’s low risk tolerance. The capital plan

If Handelsbanken were to suffer serious losses despite its historically low risk tolerance, the Bank holds capital to ensure its survival even in the wake of unexpected, extreme events. Capital planning is based on assessments of the capitalisation based on statutory capital requirements, coupled with calculations of economic capital and stress tests. Stress tests are vital in the Bank’s work of identifying threats and as early as possible preparing the necessary measures to ensure satisfactory capitalisation in all situations.

also contains proposals for how to maintain the capital situation at a satisfactory level in a strongly negative business environment, from both a regulatory and shareholder perspective.

The capital planning is divided into short-term and mid- to long-term forecasting. The part of capital planning that comprises short-term fore-casts up to two years ahead principally focuses on assessing existing performance and the development of the capital requirement. This forecasting is necessary to enable continual adaptation of the size and composition of the capital base.

The capital planning work is performed through an ongoing analysis of changes in vol-ume, risk and performance, and by monitoring events that may affect the capital requirement and capital volume. Short-term forecasting includes all sub-components that make up the Group’s capital base. This work also includes conducting various sensitivity analyses, with a short-term perspective, of the expected change in the capital adequacy requirement and capital base. The Bank can thus be prepared to alter the size and composition of the capital base if required – through market operations, for example.

The result of the short-term analysis forms the basis of any capital operations performed and is continually reported to the CFO and, if necessary, to the Group Chief Executive and Board. The analysis is based on a cautious basic scenario, with decision points in the near future for how the existing earnings capacity can cope with various changes in volume, as well as what effects arise from potential capital operations.

The part of capital planning that comprises mid- to long-term forecasts aims to ensure compliance with statutory capital adequacy requirements and that the Group’s AFR at

all times covers by a good margin all risks calculated according to the economic capital model. The objective is to forecast expected performance and judge whether the Bank’s resistance is satisfactory in various scenarios. The planning period is at least five years and takes account of the Group’s overall business performance trend.

Scenario and stress tests are also continu-ously performed in this forecasting work. A basic scenario forms the foundation of the capital forecast. This scenario is obtained from expected performance in the next five years re-garding profit, volume growth, financial assump-tions such as loan losses, and performance of the equity, property and fixed income markets. The basic scenario is then compared to the outcomes in a number of business cycle and crisis scenarios. The stress scenarios have been established following analysis of the historical links between the impacts of different macro-economic variables on the financial markets and have been selected by using the scenarios expected to have the greatest adverse impact on Handelsbanken.

The result of the internal capital adequacy assessment is reported quarterly to the Board.

At the end of 2012, the tier 1 capital ratio according to Basel II was 21 per cent, since the Bank, pending a decision concerning capital regulations, has decided to increase its capitali-sation to a level exceeding the Bank’s target interval in Basel II of 9–11 per cent. The ratio between AFR and EC was 213 per cent at the same date.

The Bank’s strong position is further em-phasised by the result of the various forward-looking stress scenarios which are carried out, showing that Handelsbanken’s long-term capital situation is very stable in both a financial and statutory perspective.

CAPITAL BASE AND CAPITAL REQUIREMENT


Capital base and capital requirement

CAPITAL BASEThe Bank’s Annual Report provides a descrip-tion of the composition of the capital base for the banking group, the terms applying to the different parts of the capital base and the deductions from the various items.

For the Bank’s risk management, it is impor-tant that in risk terms both the Group and the banking group can be viewed as one unit. To enable efficient risk management in the Group, capital may need to be re-allocated among the various companies in the Group. In general, Handelsbanken is able to re-allocate capital among the Group companies, to the extent that is permitted by legislation, for example, with reference to capital adequacy requirements and restrictions in corporate law. The Bank sees no other material or legal obstacles to a rapid transfer of funds from the capital base, or repay-ment of liabilities between the parent company and its subsidiaries.

Handelsbanken aims to maintain a satisfactory capital level which exceeds the minimum legal requirements by a wide margin.

Capital baseSEK m 2012 2011

TIER 1 CAPITAL

Equity, Group 106 897 94 524

Accrued dividend, current year -6 804 -6 085

Deduction of equity outside the banking group -1 167 -558

Difference in result between banking group and Group 2 853 -520

Minority interests, Group -2 0

Equity, capital base 101 777 87 361

Innovative tier 1 capital contributions 9 323 11 254

Non-innovative tier 1 capital contributions 2 903 2 910

Minority interests, banking group 572 423

Deducted items

Goodwill and other intangible assets -7 458 -7 234

Revaluation reserve -108 -115

Value adjustements for positions measured at fair value -14 -56

Deferred tax assets -61 -386

Special deduction for IRB institutions -1 094 -945

Capital contribution in companies outside the banking group -1 483 -234

Positions in securitisation -248 -219

Adjustments in accordance with stability filter

Cash flow hedges -1 149 676

Unrealised accumulated gains, shares -797 -133

Unrealised accumulated gains/losses, fixed income instruments 170 246

Total tier 1 capital 102 333 93 548

TIER 2 CAPITAL

Perpetual subordinated loans 3 133 11 710

Dated subordinated loans 4 274 7 957

Additional items

Unrealised accumulated gains, shares 797 133

Revaluation reserve 108 115

Deducted items

Special deduction for IRB institutions -1 094 -945

Capital contribution in companies outside the banking group -1 483 -234

Positions in securitisation -248 -219

Total tier 2 capital 5 487 18 517

Total tier 1 and tier 2 capital 107 820 112 065

Deductable items from total capital base

Capital contribution in insurance companies -4 417 -4 417

Surplus value pension assets -1 524 -1 471

Total capital base for capital adequacy purposes 101 879 106 177

CAPITAL BASE AND CAPITAL REQUIREMENT


CAPITAL REQUIREMENTThe capital requirement for credit risks is calcu-lated by a risk-weighted exposure amount being calculated for all the banking group’s exposures. The risk-weighted exposure amount for credit risk is partly calculated according to the IRB internal risk classification model, foundation and advanced approaches, and partly according to the standardised approach. Handelsbanken applies the standardised approach for calculat-ing operational risks. The Swedish Financial Supervisory Authority’s standardised approach is used to calculate the capital requirement for market risk.

The adjoining table shows the total capital requirement and its various components.

CAPITAL ADEQUACY FOR THE FINANCIAL CONGLOMERATEInstitutions and insurance companies which are part of a financial conglomerate must have a capital base which is adequate in relation to the capital requirement for the financial conglomerate. The capital base for the financial conglomerate has been calculated by means of a combination of the aggregation and settle-ment method and the consolidation method. This means that the capital base for the banking group has been combined with the capital base for the Handelsbanken Liv AB insurance group. Correspondingly, in order to calculate the requirement for the conglomerate, the solvency requirement for the insurance group has been added to the capital requirement for the banking group.

Capital adequacy financial conglomerateSEK m 2012 2011

Capital base after reduction and adjustments 107 482 108 734

Capital requirement 81 451 80 078

Surplus 26 031 28 656

Capital requirementSEK m 2012 2011

Credit risk

Credit risk according to standardised approach 3 799 3 760

Credit risk according to IRB approach 30 174 31 904

Market risk

Interest rate risk 880 850

of which general risk 660 711

of which specific risk 220 139

Equity price risk 26 14

of which general risk 10 6

of which specific risk 13 7

of which funds 3 1

Foreign exchange risk - -

Commodities risk 9 20

Settlement risk 3 -

Operational risk

Operational risk 4 181 4 117

Total capital requirement according to Basel II 39 072 40 665

Adjustment according to transitional rules 41 426 38 389

Total capital requirement according to Basel II transitional rules 80 498 79 054

Risk-weighted assets according to Basel II transitional rules 1 006 219 988 180

Risk-weighted assets according to Basel II 488 400 508 317

Capital adequacy analysis, % 2012 2011

Capital requirement in Basel II compared to transitional rules 49 51

Capital ratio according to

Basel II 20.9 20.9

transitional rules 10.1 10.7

Tier 1 capital ratio according to

Basel II 21.0 18.4

transitional rules 10.2 9.5

Core tier 1 capital ratio according to

Basel II 18.4 15.6

transitional rules 9.0 8

Capital base in relation to capital requirement

Basel II 261 261

transitional rules 127 134

BANKING GROUP


Banking group

Companies included in the banking groupCorporate identity

number Domicile

Handelsbanken AB (publ)1 502007-7862 Stockholm

SUBSIDIARIES

Handelsbanken Finans AB1 556053-0841 Stockholm

Kredit-Inkasso AB 556069-3185 Stockholm

Handelsbanken Rahoitus Oy 0112308-8 Helsinki

Kreditt-Inkasso AS 955074203 Fredrikstad

Handelsbanken Finans (Shanghai) Financial Leasing Co., Ltd 310101717882194 Shanghai

Stadshypotek AB1 556459-6715 Stockholm

Stadshypotek Delaware Inc. (in liquidation) 98-0342158 New York

Svenska Intecknings Garanti AB Sigab (inactive) 556432-7285 Stockholm

Handelsbanken Fondbolagsförvaltning AB 556070-0683 Stockholm

Handelsbanken Fonder AB 556418-8851 Stockholm

Handelsinvest Investeringsforvaltning A/S 12930879 Copenhagen

Handelsbanken Fondbolag Ab 1105019-3 Helsinki

Handelsbanken Kapitalförvaltning AS 973194860 Oslo

XACT Fonder AB (in liquidation) 556582-4504 Stockholm

AB Handel och Industri 556013-5336 Stockholm

Ejendomsselskabet af 1. januar 2002 A/S 38300512 Herning

Ejendomsselskabet af 1. maj 2009 A/S 59173812 Hillerød

Forva AS 945812141 Oslo

Lejontrappan AB 556481-1551 Gothenburg

Handelsbanken Markets Securities, Inc1 11-3257438 New York

Handelsbanken Mezzanine Fond 1 KB (inactive) 969710-3126 Stockholm

Handelsbanken Mezzanine Management AB (inactive) 556679-2668 Stockholm

Lokalbolig A/S 78488018 Hillerød

Rådstuplass 4 AS 910508423 Bergen

SIL (Nominees) Limited (inactive) 1932320 London

Svenska Handelsbanken Delaware Inc. 13-3153272 Delaware

Svenska Handelsbanken S.A.1 RCS Lux B-15992 Luxembourg

Svenska Property Nominees Limited (inactive) 2308524 London

ZAO Svenska Handelsbanken (in liquidation) 1057711005384 Moscow

Handelsbanken Fastigheter AB 556873-0021 Stockholm

Sv Handelsbanken Representacöes (Brasil) Ltda 15.367.073/0001-93 Sao Paulo

ASSOCIATES

Bankomatcentralen AB 556197-2265 Stockholm

BDB Bankernas Depå AB 556695-3567 Stockholm

BGC Holding AB 556607-0933 Stockholm

Bankgirocentralen BGC AB 556047-3521 Stockholm

Devise Business Transactions Sweden AB 556564-5404 Stockholm

Finansiell ID-teknik BID AB 556630-4928 Stockholm

Upplysningscentralen UC AB 556137-5113 Stockholm

UC Ekonomipublikationer AB 556613-0042 Stockholm

UC allabolag AB 556730-7367 Stockholm

Bankomat AB 556817-9716 Stockholm

Getswish AB 556913-7382 Stockholm1 Credit institution.

Companies not included in the banking groupCorporate identity

number Domicile

Handelsbanken Liv Försäkring AB (the Group excluding Handelsbanken Fastigheter AB) 516401-8284 Stockholm

Svenska Re S.A. RCS Lux B-32053 Luxembourg

Handelsbanken Skadeförsäkrings AB 516401-6767 Stockholm

Handelsbanken Renting AB (in liquidation) 556043-2766 Stockholm

Flisekompaniet Holding AS 992999136 Oslo

Dyson Group plc 163096 Sheffield

Plastal Industri AB 556532-8845 Gothenburg

Festival AS 993798304 Kristiansand

DEFINITIONS AND EXPLANATIONS


Definitions and explanationsCAPITAL BASE The capital base is the sum of tier 1 (primary) and tier 2 (supplementary) capital. To obtain the total capital base for capital adequacy purposes, deductions are made for capital contributions in insurance compa-nies, reported surplus values of pension assets and the difference between the expected loss and the provisions made for probable loan losses. For a more detailed description of the capital base, see note G49 in the Annual Report.

CAPITAL REQUIREMENT The statutory capital requirement is that the capital base must be at least 8 per cent of the Risk-weighted amount. In this calculation, the capital base is reduced by the net of EL minus provisions.

CAPITAL RATIO The total capital base for capital adequacy purposes in relation to risk-weighted volume.

CFThe coversion factor that is used when calculating EAD for unutilised overdraft facilities, committed loan offers, guarantees and other off-balance-sheet commitments.

CORE TIER 1 CAPITALTotal tier 1 capital excluding tier 1 capital contributions.

CORE TIER 1 CAPITAL RATIO Core tier 1 capital in relation to risk-weighted volume.

CREDIT RISK EXPOSURE The exposure which is subject to a capital requirement according to the credit risk regulations in FFFS 2007:1.

CREDIT RISK PROTECTION Risk-reducing factors/measures, such as property mortgages.

DEFAULTAn exposure to a specific counterparty is deemed to be in default if any of the following criteria are fulfilled:– The institution deems it probable that the counter-

party will not be able to fulfil its commitments to-wards the institution without the institution having to realise collateral, if any, or take similar measures.

– The counterparty is more than 90 days late with a payment unless it is an insignificant amount.

EAD Exposure at default. This is the same as Basel exposure which is the amount subject to a capital requirement. It is calculated inclusive of interest and fees. Off-balance-sheet amounts are recalculated with the conversion factor (CF). For derivatives, EAD is calculated as positive MTM (replacement cost) plus value change risk (i.e the nominal amount multiplied by the upward adjustment factor).

ELExpected loss. It is the same as Expected loss amount, i.e. PD x LGD x EAD.

EXPOSUREExposure means the total exposures on and off the balance sheet.

EXPOSURE AMOUNTExposure amount is the same as EAD.

HAIRCUT The percentage by which the market value of a financial asset is reduced to take into account the risk of price movements when calculating capital require-ments, margins and collateral.

IMPAIRED LOANLoans are classified as impaired loans if contracted cash flows are not likely to be fulfilled. The full amount of all claims which give rise to a specific provision is included in impaired loans, even if parts are covered by collateral.

IRB Internal rating-based approach for risk classification.

ITRAXXITRAXX Financials is an index of CDS spreads for the 25 largest bond issuers in the European bank and insurance sector. It describes the average premium that an investor requires in order to accept credit risk on the companies.

LCRLiquidity Coverage Ratio. The Basel Committee’s proposal for a short-term stress measure of liquidity. The Basel Committee’s definition differs from that of the Swedish Financial Supervisory Authority.

LGDLoss Given Default. It is the same as the proportion of an exposure that the Bank loses on average in the event of a default.

LOAN LOSS RATIOLoan losses and changes in value of repossessed property in relation to loans to the public and credit institutions (excluding banks) at the beginning of the year, and also repossessed property and credit guarantees.

LTVLoan-to-value ratio.

MM stands for Maturity and refers to the maturity according to the IRB regulations.

OTC DERIVATIVES Over-the-counter derivatives are the same as un-cleared tailor-made derivatives.

PD The probability of default is the same as the probabil-ity of a borrower defaulting within one year. A PD of 0.2 per cent implies that two borrowers out of 1,000 are expected to default within one year.

PROPORTION OF IMPAIRED LOANS Net impaired loans in relation to total loans to the public and credit institutions (excluding banks). Impaired loans are reported without deduction for the collateral which exists to secure the claim.

RISK WEIGHTA measure to describe the level of risk an exposure is expected to have according to the capital adequacy regulations.

RISK-WEIGHTED ASSETSTotal risk-weighted amount. The statutory capital requirement is based on this.

RISK-WEIGHTED VOLUMEThe total risk-weighted amount from each credit risk exposure. The risk-weighted amount is the same as the risk weight of the exposure multiplied by its expo-sure amount. The risk weight is based on a number of factors such as the repayment capacity and debt-servicing of the counterparty, type of product and the value of any collateral.

RISK-WEIGHTED AMOUNTRisk-weighted amount is the risk weight for each ex-posure multiplied by the size of the exposure (EAD).

STANDARDISED APPROACHThe method of calculating and reporting credit risks in Basel II. It is based on standardised risk weights on the basis of the external rating.

TIER 1 CAPITALTier 1 capital is one of the components of the capital base and comprises equity and tier 1 capital contributions. Deductions are made for, inter alia, dividends generated, goodwill and other intangible assets, and also the difference between an expected loss and provisions made for probable loan losses. Profits generated in the Group’s insurance company are not included in the tier 1 capital. For a more detailed description of the capital base, see note G49 in the Annual Report.

TIER 1 CAPITAL RATIOTier 1 capital in relation to risk-weighted volume.

TIER 1 CAPITAL CONTRIBUTIONSTier 1 capital contributions (hybrid loans) comprise subordinated loans that may be included in the tier 1 capital with the consent of the Swedish Financial Supervisory Authority.

TIER 2 CAPITALTier 2 capital is one of the components of the capital base and mainly consists of perpetual and fixed-term subordinated loans. For a more detailed descrip-tion of the capital base, see note G49 in the Annual Report.

VAR Value at Risk. A probability-based risk measure.

FINANCIAL INFORMATIONThe following reports can be downloaded or ordered from Handelsbanken’s website handelsbanken.se/ireng:

IMPORTANT DATES 20136 February Highlights of Annual Report 201220 March Annual general meeting24 April Interim report January – March 201317 July Interim report January – June 201323 October Interim report January – September 2013

www.handelsbanken.com +46 8-701 10 00 SE-106 70 Stockholm

Documents

information according to Pillar 3 2012mb.cision.com/Main/3555/9371358/92924.pdf · OPERATIONS 51 OPERATIONAL RISK 52 RISKS IN THE COMPENSATION SYSTEM 54 ECONOMIC CAPITAL 55 CAPITAL